What does Labor's new super tax mean for you?
Labor’s proposed new super tax is back in the spotlight, with signs suggesting the Government still intends to introduce it. Aimed at individuals with superannuation balances above $3 million, the tax would effectively lift the rate on earnings from these funds to 30%, with the controversial inclusion of unrealised capital gains as earnings. While it remains subject to legislation, the likely implementation from 1 July 2025 means affected individuals should start reviewing their strategies now. In this article, we break down the key aspects of the proposed tax and outline options to help you make informed decisions.
Key points
- While still subject to legislative passage it is looking increasingly likely that the Government still intends to introduce the new tax.
- It will mean that income, such as interest, derived on super balances above $3m will be taxed at broadly 30% (15% fund tax rate and 15% new tax rate).
- Controversially unrealised capital gains will also be included in the definition of income for this new tax.
- Individuals with large super balances should be considering the best approach if the new tax is implemented as currently expected
For those who may be impacted by the new tax, we set out below our thoughts on what may eventuate and what planning options can be considered.
Will the proposed super tax proceed?
It is difficult to say with certainty, but it appears the Government intends to proceed with the new tax. With the composition of the Senate, all signs point to it being easier for the Government to get the tax legislation through the next Parliament.
Will the tax design change?
The two most controversial elements of the previous tax design were:
1. The outcome that unrealised capital gains would be subject to the new tax.
2. The non-indexation of the $3m threshold where the new tax commences to apply; meaning more people would be impacted over time.
There has been consistent feedback to Government that these controversial elements should be changed, and making these changes would be reasonably simple. However, the Government has shown no inclination to redesign the tax and that’s unlikely to change, particularly with a more favourable Senate in place.
Will the start date change?
The new tax was originally stated to commence from 1 July 2025, and you could expect the start date would be deferred to allow for appropriate planning. However, it is possible the Government may legislate for the new tax to start from 1 July 2025 as was contemplated in the previous legislation – so we will have to wait and see.
Expected impacts of the new super tax
The new tax (ignoring the impacts of the pension exemption) will have two major impacts:
1. Income, such as interest, derived on super balances above $3m will be taxed at broadly 30% (15% fund tax rate and 15% new tax rate).
2. Capital gains, assuming assets have been held for more than 12 months, will be taxed at broadly 25% (10% fund tax rate on realisation after applying the available discount and the 15% new tax rate on unrealised gains along the way while the asset is held by the super fund).
Planning options
The big question is: If you are likely to be impacted by the new tax, is there anything you should be doing now? The answer depends on your individual circumstances.
With the tax applying to 2025-26 FY, even with a start date of 1 July 2025, there is still time to assess any plans and implement strategies prior to 30 June 2026 to avoid or reduce the Division 296 tax. Importantly, any strategies to minimise the impact of the tax will need to consider a range of variables including your alternative investment structures, estate plans, and investment strategy.
For many people, keeping funds in superannuation will continue to be the best option as the rate of tax is still concessional in comparison to personal or corporate tax rates. For others, it may be an opportunity to review your current investment vehicles to identify the most tax effective strategies moving forward.
In most cases, we will recommend waiting until the final legislation is passed before withdrawing any funds as there might not be an opportunity to contribute that money back into super if the legislation does not proceed as expected.
Valuations at 30 June 2025 are even more important
We recommend you pay particular attention to 30 June 2025 valuations of unlisted super fund assets. The new tax will apply on market value movements in asset values across a financial year and potentially apply from 1 July 2025.
Making sure 30 June 2025 valuations of unlisted assets are correct will be particularly important.
What now?
While there is currently no certainty concerning the likely outcome, in our view, individuals who may be impacted by the new tax should start considering the best approach to take if the new tax is implemented as currently expected.
If you would like to discuss your personal circumstances, please contact us today.
