6 ways to approach the proposed $3 million super tax
Should clients with more than $3 million in super withdraw money to avoid the proposed new tax? Or would they be better off leaving their money in super? Meg Heffron, Managing Director at Heffron, discusses six strategies you might be considering for your clients.
While it’s still early days, and we haven’t even seen the draft legislation yet, there’s already a lot of discussion in the industry about a proposed new super tax. Set to begin in FY26 (if it goes ahead), it will apply to individuals who have a total super balance of more than $3 million at the end of each financial year. The tax will be an additional 15% on a proportion of their super earnings, charged as a separate tax that the individual can either pay outright or use funds released from their super.
So far, this proposed tax hasn’t been well received. Depending on how the legislation is drafted, there may be issues around taxing unrealised capital gains, a lack of indexation, and inequitable treatment of younger people who don’t have the option of withdrawing money from super.
Meg Heffron, Managing Director at Heffron, conducted comprehensive modelling to determine how this proposed tax may impact clients and what strategies might provide the best outcomes.
1. Withdraw the excess amount from super
The gut reaction to this proposed tax from many clients, advisers and accountants may be that the best response is to withdraw the excess amount above $3 million and invest it elsewhere, providing the client is over preservation age and has this option available to them. However, Meg says this may not be the right decision for some clients. Her modelling revealed several factors that influence whether withdrawing the excess amount will result in the best outcome for the client over time.
Meg said, “First of all, where’s the return coming from – income or growth? Secondly, how much will it cost to get the money out of super? And thirdly, how much tax will they be paying outside super? I thought the modelling would show that it was a no brainer to start stripping money out of super, but the results showed that these factors will determine whether it’s a good idea or a bad idea.”
2. Stop contributing to super
If a client already has more than $3 million in super, or they’re getting close to that point, it may seem obvious that they should stop making contributions to super now. However, Meg isn’t convinced that this approach has many benefits for clients.
“Every contribution will generally have some other driver for a client,” Meg said. “Maybe the tax deduction for concessional contributions is still useful for them. If they’ve sold a small business, they will still want to make CGT-exempt contributions. It may still be worthwhile to make a downsizer contribution and then decide whether to take the money back out again at some future point. I’m not convinced that this tax should impact current contribution patterns.”
3. Even up balances
While it may be a bit late for older couples who both have a large amount of money in super, Meg feels it’s important to even up super balances between couples wherever possible. She recommends putting strategies like contribution splitting and re-contributions into place now, well ahead of the tax’s proposed start date of FY26.
“They’re great tools, but they take an age to actually have an impact, so you definitely want to get those strategies organised early.” she said.
Meg also suggests thinking about whether investment choice can be used to even up balances between members of a couple.
She said, “Some advisers are moving the assets of clients with a high super balance into stable assets, to minimise the impact of fluctuations in their account balance if they’re getting close to that $3 million. Then they’re moving the assets of that client’s partner into growth assets if they have a lower super balance so the couple can still participate in market gains that way.”
4. Revisit reversionary pensions
If a client receives a reversionary pension after their partner passes away, this may push them over the $3 million threshold even if they weren’t close to it before. For this reason, Meg suggests it may be beneficial to think about whether you should set up your clients’ pension to be reversionary or not.
“If a pension isn’t reversionary, you have more control about when that money will count towards the client’s total super balance,” Meg said. “The tax is calculated on the total super balance at the end of the financial year, so you may decide to delay the start of the pension until 1 July the following financial year. This opens up opportunities for the client to make non-concessional contributions both in the year of their partner’s death and also the following year before the tax comes into effect.”
5. Observe timing on contributions
Similar to starting a reversionary pension, making a large contribution such as a downsizer or CGT-exempt contribution towards the end of a financial year may push a client over the $3 million threshold, or make a greater proportion of their earnings subject to the proposed tax. Where possible, Meg recommends delaying large contributions to the beginning of a financial year.
“While there are a lot of factors that will determine whether that’s an appropriate decision to make, the last thing you want to do is spike a client’s super balance right on or before 30 June if they’re going to be subject to this tax,” Meg said.
6. Minimise values at the right time
There may be an opportunity to maximise the value of a client’s SMSF at 30 June 2025 and then minimise increases in value thereafter.
Meg said, “Accountants may be looking at reintroducing (or continuing with) tax effect accounting to make allowance for tax on unrealised gains in end of year figures. It’s also possible to report a different value for total super balance in the super fund tax return, rather than using the default number from the member statements. This will allow for disposal costs, winding up the SMSF, or selling the assets and paying tax. That approach may be simpler than trying to reintroduce tax effect accounting in financial statements.”
What’s the best option?
There’s unlikely to be one approach that will suit every client who may be subject to this tax. Meg’s final piece of advice is to take the time to go through each option with your clients and not rush into making a decision too early.
“While this proposed tax is definitely going to make super less attractive for certain clients, none of my modelling presents a crushing imperative to rip money out right now,” Meg said. “What it does suggest to me is that clients can take their time to think about what they want to take out of super and what they want to leave in. The other key thing is to think very carefully about timing because this can have a massive impact on exempt current pension income (ECPI) for a particular year, based on when they choose to take the money out.”
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