Hidden costs in consolidating super

02 Jun 2022
Sean Johnston

Sean Johnston

Client Relationship Manager

It’s always worthwhile considering the benefits of consolidating your client’s super but sometimes there are hidden costs.

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As we are hurtling full speed towards 30 June again, many of us are taking the opportunity to simplify our financial affairs. It stands to reason that many of our clients are also doing the same.

One easy way to simplify their financial affairs is to cull out any unnecessary products they have accumulated over the years.

Have an old bank account they don’t use? Close it.

Have a credit card they haven’t bought anything with for a year? Cancel it.

Have superannuation benefits in multiple funds? Consolidate them.

Just hold fast on that last one for a second.

Whilst an ordinary rollover between funds doesn’t usually have too many complications (SuperStream notwithstanding), there are a number of cases where rolling over certain types of superannuation benefits can create some unforeseen problems.

Untaxed Funds

Lyn Formica has previously mentioned one of the big issues in rolling over funds containing untaxed elements in her blog here. I would suggest that you read her article to get a full appreciation of the issue but as a short recap:

Certain types of superannuation funds (usually funds related to Government bodies or Defence related superannuation) don’t, and in fact can’t, pay tax when members contribute or when they generate earnings along the way.

We call these funds “untaxed funds.”

To make up for the fact that these funds aren’t taxed along the way, the members in these funds pay tax on their withdrawals when they start taking money out of the fund.

Unfortunately, a rollover of these benefits to another fund counts as a withdrawal and tax will be levied on the amount rolled over.

In 2021/22, the first $1,615,000 of any rollover will be taxed at 15% when it enters the new fund – this amount is known as the untaxed plan cap amount. Anything above this amount will be taxed at 47% in the hands of the transferring fund before the net benefit is rolled over to the new fund (as a small concession the residual 53% is rolled over as a tax-free component).

Defined Benefit Funds

Another type of superannuation fund that can have some hiccups is a defined benefit fund.

A defined benefit fund is one where the member does not have an account balance in the fund.  Rather their retirement benefit is determined by a formula.

Because a member of a defined benefit interest does not have an account balance, it is practically impossible for the Government to apply the same rules as it would in a normal fund.

One example of this is Division 293 tax. Div 293 tax is a modified rate of tax on super contributions for high income earners. In practice it means that people with income over $250,000 pay tax at 30% on their contributions rather than 15%. The first 15% tax is levied to the fund, and the second 15% is levied to the individual. In normal funds, the member can apply to withdraw enough from super to cover this second 15%.

Because members of defined benefit funds don’t have an account balance from which to deduct money to pay a Div 293 tax assessment, they are often given the choice:

  • Pay the extra tax PERSONALLY as they go, or
  • Accrue the tax against their final benefit.

If they are accruing the tax against their defined benefit account, then they will need to pay this when they start to make withdrawals.

As with the untaxed element mentioned above, a rollover counts as a withdrawal and will trigger the liability to start paying this Div 293 debt. Whilst the accrued liability for Div 293 tax is usually considerably smaller than the tax on untaxed elements, it can still run into the tens of thousands of dollars.

Luckily, most defined benefit funds will show a running summary of the accrued tax liability on the member benefits statements (although I haven’t been able to confirm if all of them do).

Whilst I’ve treated these two types of superannuation funds as separate above (they can be separate) in a large number of cases these two types of accounts overlap – a fund will be both an “untaxed fund” and a defined benefit fund.

Someone rolling over from one of these funds may find themselves in a situation where they are taxed on the untaxed amount AND they will have to pay their accrued Div 293 tax.

If you haven’t factored these in when planning your client’s rollover, it’s definitely going to be a shock for all involved as the tax bill might run into the hundreds of thousands of dollars.


These taxes will need to be paid in one form or another in the future, so they shouldn’t be a reason to not rollover from one of these funds IF the long-term benefit to the client is justifiable.

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