The Government has released information to support the announced proposed changes to cap tax concessions on high balance super accounts from 1 July 2025.
After the initial media release (28 February) and Factsheet release (2 March), a consultation paper ‘Better Targeted Superannuation Concessions’ was released on 31 March.
This paper provided additional information in relation to how the proposed model will operate. It posed a number of questions to industry stakeholders about the implementation of the proposed changes to cap tax concessions on high balance super, and invited feedback.
Below, we have provide a comprehensive summary of what we know so far.
Additional information released by the Government on 31 March:
- There will not be legislative provision for indexation of the $3 million threshold. While this does not exclude the possibility of this threshold increasing in the future, it means that there is no provision for indexation tied to CPI or other financial and economic indicators as currently applies to contribution caps and the transfer balance cap.
- The Government specifically requested stakeholder feedback to help determine whether a more appropriate definition of Total Super Balance (TSB) should be amended to avoid any unintended consequences of using the existing definition. However, it is specifically noted that TSB currently includes the outstanding balance of certain LRBAs, and the exclusion of structured settlement contributions.
- The calculated earnings formula is adjusted to exclude contributions (to ensure they aren’t taxed as earnings), and to add back withdrawals made from the fund, which would otherwise have been included in as earnings as a result of their inclusion in TSB. The consultation paper indicates that proceeds paid from super insurance policies would be excluded as contributions, as would transfers into the fund including family law splits.
- While the intention is to minimise any new reporting requirements, some changes may be required for the model to function as proposed.
- It is expected that the first additional taxation notices will be sent to impacted individuals in the second half of 2027.
- The intention to apply commensurate treatment to defined benefit and constitutionally protected funds was reaffirmed.
Current vs. Proposed Taxation of Accumulation Phase
Tax on earnings within the accumulation phase is currently capped at 15% and there is no limit on the total amount that an individual can hold in accumulation.
What will this mean for individuals with high balance super accounts going forward?
Under the proposed changes:
- Individuals with a TSB greater than $3 million at the end of a financial year (first tested on 30 June 2026), will be subject to additional tax;
- Calculated earnings on amounts in accumulation phase above $3 million will be taxed at an additional rate of 15% on top of the existing rate of tax, bringing the total tax payable to 30%;
- The additional tax will only be payable on the calculated earnings attributable to the balance that exceeds $3 million;
- The $3 million threshold will not be indexed;
- Calculated earnings for this purpose will not be actual fund earnings, but will instead be based on the individual’s TSB at the start and end of the year, after adjusting for any contributions or withdrawals made;
- If the individual has negative calculated earnings for a year, they may carry this forward to offset any additional tax which they become liable for in a future year;
- Existing Capital Gains Tax (CGT) concessions available to the super fund will not be impacted;
- The additional tax will only apply to calculated earnings from the commencement date and will not be applied retrospectively;
- The additional tax will be able to be paid by the individual, or released from superannuation, similar to Division 293 tax;
- The additional tax will be imposed separately to personal income tax, and similar to Division 293 tax, cannot be reduced by personal deductions, offsets or losses;
- The changes will also apply to defined benefit funds;
- The changes will apply regardless of whether a condition of release has been met.
If a condition of release is not met, it will not be possible to remove amounts in excess of $3 million from super.
Calculation of Earnings and Tax Liability
Calculated earnings are determined based on TSB at the beginning and end of the year, adjusted to:
- Deduct net contributions (contributions net of contributions tax), to ensure that contributions don’t inflate the calculated earnings;
- Include withdrawals, which includes amounts removed from the super system and no longer captured in TSB at the end of the year (lump sum withdrawals and income stream payments).
The Government has indicated that net contributions to the fund for this purpose would also include insurance policy proceeds where the policy is owned by the fund, and transfers such as family law splits.
It is important to note that TSB for this purpose is currently based on the existing definition of TSB and will:
- Include the outstanding balance of certain limited recourse borrowing arrangements, and
- Exclude structured settlement contributions.
In addition to amounts in retirement phase, TSB includes the value of accumulation accounts and transition to retirement pensions that the member would be entitled to receive if they withdrew their full interest from the fund.
Further modifications to the use and definition of TSB for this purpose may be necessary where unintended outcomes are generated.
How are calculated earnings and additional tax proposed to be calculated?
The following formulas have been proposed to determine calculated earnings and the tax payable.
- Calculated earnings = TSB at the end of current financial year – TSB at the end of previous financial years + withdrawals – net contributions
- Proportion of earnings that are taxable = (TSB at the end of the current financial year – $3 million) / TSB at the end of the current financial year
- Tax liability = 15% x calculated earnings x proportion of earnings that are taxable
Where a person’s TSB in the previous year was less than $3 million but grows in the subsequent year to more than $3 million, or was more than $3 million but reduces in the subsequent year to less than $3 million: An adjustment will be made to the formula to ensure that earnings on amounts less than the threshold are not subject to tax. The person’s TSB at the previous 30 June will be substituted with $3 million, rather than their lower actual TSB.
Case studies demonstrating the way in which earnings are calculated and tax is applied can be found in the ‘Better Targeted Superannuation Concessions’ consultation paper.
Fund reporting processes and notification to individuals of tax liability
The proposed changes commence from 1 July 2025 and the 2026/27 financial year is expected to be the first year that impacted individuals will be issued with a notice of tax liability by the ATO. The Government has indicated that it is expected that the first round of tax liability notifications will be sent in the second half of 2027.
While initially the Government indicated that the model was intended to operate based on existing reporting requirements, the consultation paper released on 31 March states that some amendments to reporting will likely be required to support the proposal.
It is noted that any additional reporting requirements for SMSFs will likely be wrapped up in the end of year tax return process, while APRA funds may need to expand existing reporting arrangements.
We understand that this is a lot of information to take in. But please note, all information regarding the proposed changes to cap tax concessions on super are purely proposed and are subject to change.
For further clarification on what this may mean for you and your superfund get in touch with one of our Specialist Advisors. You can contact us here, we are here to help with any questions or concerns you may have regarding the proposed changes.
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