How super is taxed now

Superannuation investment earnings are taxed at 15% during the accumulation phase, that is, pre-retirement.

Investment earnings in the retirement phase are tax-free up to the Transfer Balance Cap ($2 million in 2025-26) with balances over that amount attracting 15% tax on investment earnings.

What is the proposed change

The Federal Government has proposed an additional 15% tax on the earnings on member super balances that exceed the $3m threshold, effective the 2025-26 financial year. This tax is in addition to any tax their super funds pay on earnings in accumulation and means earnings attributed to balances over $3m at the end of the financial year will generally attract a combined headline rate of 30%.  

• This tax targets member super balances exceeding $3m (not at the fund level). Where a member has several funds, they need to add them all up to see whether they have more than $3m in total.
• The tax is on the earnings of the super balance over $3 million, not on the balance itself.
• It works by charging an extra tax on some of the growth in a member’s super. The Division 296 tax is calculated using the formula:

15% x a proportion x earnings

• Proportion: The part of the super balance over $3m. For example, if a member has $5m, the proportion is 40% i.e. $5m-$3m/$5m.
• Earnings: The growth in the super balance, including income from investments (rent, interest, dividends, trust distributions, realised gains) and unrealised capital gains.

The formula below will be used for calculating earnings in a financial year:

Earnings = Total Super Balance (TSB) current financial year – TSB previous financial year + withdrawals – net contributions

• Division 296 tax is a personal tax charged to the member themselves, but members can choose to pay it from their super.
• This is an increase from the current 15% tax rate on accumulation super balances. The tax exemption on earnings for superannuation pension balances remains unchanged.
• It is not a cap on how much anyone can have in super, just an extra tax if you do have more than $3m.

Examples

Accumulation balance exceeding $3m
If a member has $4m in super at the start of the year and it grows to $4.7m by the end of the year, the earnings are $700,000.

• The proportion over $3 million is 36.17% (being $4.7m - $3m/$4.7m)
• The tax would be: 15% x 36.17% x $700,000 = $37,978.50

Balance exceeding $3m and withdrawing a retirement pension

Retired member over 60 and draws a minimum income stream

The member has withdrawn a pension of $80k during the year.

• The formula below will be used for calculating earnings in a financial year:

Total Super Balance (TSB) current financial year – TSB previous financial year + withdrawals – net contributions

Earnings = $5.42m - $5m + 80k = $500k

• The proportion of earnings corresponding to funds over $3m that will be taxable is calculated as:

Taxable % = $5.42m - $3m/$5.42m = 44.64%

• The tax liability is calculated as follows:

15% x $500k x 44.64% = $33,480

Impact on existing super members

• Anyone with less than $3m at the end of a particular financial year will not be impacted that year.
• Members with balances over $3 million will see an additional tax on their super earnings.
• Although there is still no legislation passed, the new tax is proposed to apply to earnings for the year ending 30 June 2026. This will affect earnings from 1 July 2025 - to be calculated after the 2026 financial year end.

• It only taxes growth in the investments from 1 July 2025 onwards, not before that time. This tax is designed to tax the profits as they build up not when the investments are sold.

What action can you take

• For members who have met a condition of release, this month is a window to consider strategic options - retaining super balances or withdrawing funds to invest outside of super.
• Funds in excess of the $3m can be withdrawn (where a condition of release has been met) to reduce their super balance below $3m, avoiding the extra tax.

• Selling super accumulation assets and incurring CGT at 10% (for assets held for more than 12 months) is a planning consideration before 1 July 2025. These sales can fund lump sum withdrawals. However, as tax on realised gains is a tax on capital gains built up over the years, some may prefer to pay the Division 296 tax on future growth.  

• Some people will decide to do nothing. The new tax will make super less favourably taxed than it used to be - but a 30% tax may still be relatively attractive to some taxpayers.

What about members who have not met a condition of release

• Unfortunately, there will be some members with a balance over $3m or close to it and there isn’t a lot that can be done. Some members are thinking about selling high growth assets and investing in more defensive income generating assets.

• For those who have reached preservation age (generally 60) but not a condition of release, they can commence a Transition to Retirement Income Stream (TRIS) and withdraw up to 10% of the TRIS balance annually.

Next steps

• We will keep you updated on these proposals.
• Please contact us to discuss your specific situation and explore your options.