What to do now to beat $3m super cap

15 Nov 2023
Meg Heffron

Meg Heffron

Managing Director

The government’s proposal to add extra taxes for those with more than $3 million in their super account has certainly drawn much attention. Regardless of your views on the policy, it’s worth thinking about whether there are steps to take to prepare for it. What should those likely to be affected be doing now?

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First, don’t do anything too dramatic. The change is a proposal only – no legislation has been released (even in draft form). Even when that happens, it will have to make its way through another election (it’s not due to start until July 1, 2025) and the usual parliamentary process.

That said, it’s likely that the government will look to get the legislation in place as soon as possible and there does seem to be a lot of support for change. So, it’s reasonable to imagine that at some point in the future there will be a revised tax setting for people with large super balances.

Certainly, many would be nervous about pre-emptively withdrawing large amounts from super right now. There is no chance of getting the money back in if this measure doesn’t happen – and even if it does, there are several years to make changes. At a purely technical level, withdrawing super now also risks removing key benefits.

For example, one of the big criticisms of the new measure is that it will result in some people effectively paying tax on some of their super fund’s “unrealised capital gains”. That’s because the amount that gets taxed is based on all the growth in their super balances year-on-year (adjusted for new contributions and any money they take out, such as pension payments), not just the growth that the super fund would normally pay tax on.

How it works

As an illustration, imagine a fund has only one member (Sam) and it owns 500 shares worth $20 each (ie, $10,000 worth of shares) and during the year earned dividends of $500. You would absolutely expect Sam’s fund to pay tax on those dividends, whether it received them in cash or reinvested them.

But what if the shares also grew in value and by the end of the year those same 500 shares were worth $22 each? (So now the total value is $11,000). Sam’s fund wouldn’t normally pay tax on that extra $1000 unless or until he sold the shares.

In contrast, the earnings calculated for this new tax will include part of both the dividends and the growth. It’s worth bearing in mind that we wouldn’t see the full $1000 being taxed. If Sam’s super balance were $4 million, only 25 per cent would be taxed (he exceeds the $3 million cap by $1 million which is 25 per cent of his total balance). But it’s certainly true that the earnings on which his tax would be based includes growth in assets that the fund hasn’t sold.

Interestingly, though, it’s only growth in future years (ie, each year after this measure starts). If the shares in Sam’s fund were originally bought for $10 per share (ie, $5000), this new measure wouldn’t tax him on the gains built up before June 30, 2025 ($10,000 - $5000 = $5000). That’s quite significant when it comes to thinking about whether to take money out of super. Sam might be better to leave the shares in his fund and cop the new tax on future earnings, particularly if his balance is pretty close to $3 million.


Couple tactics

But one important action to think about now is taking steps to even up the balances held by couples.

If Sam’s wife, Jane, has only $1 million in super, they are at risk of having Sam paying the extra tax even though Jane is well within the $3 million threshold. Unfortunately, it’s not as simple as Sam just assigning some of his super over to Jane, unless they get divorced (generally not a desirable strategy just to get a better tax outcome). All other ways of evening up balances take time.

For example, if Sam is already retired or over 65, he could start withdrawing money from his own balance so that Jane can contribute it to her super account. Jane would need to be under 75 to do this and there are limits that prevent it from happening quickly.

But even if Sam can’t quite squeeze under $3 million by the first date it becomes critical (June 30, 2026 – the end of the first year), he might be able to do it over time if Jane is young enough to keep contributing to super.

Getting his balance down at some point will reduce his extra tax. (Some people might even look to extend this further and include giving money from their super to adult children to make their own contributions – although this is likely to be rare and has its own challenges.)

There are other ways to even up balances between two members of a couple, but they take a long time.

For example, imagine Jane and Sam were both in their 40s, but Sam’s balance is already starting to edge ahead of Jane’s. His employer contributions can be directed across to Jane’s account using a technique known as “contribution splitting”. The same applies if he’s making personal contributions for which he claims a tax deduction.

Unfortunately, only some types of contributions can be split in this way and these are generally limited to $27,500 a year. The contributions also need to go into Sam’s account first, and they generally can’t be transferred to Jane’s account until the following year. That’s why it takes a long time.

If the proposed change has done nothing else, it has focused many people on how important it is for couples to be thinking about keeping their super roughly even in their 30s and 40s rather than waiting until super is a top priority for them.


This article was first published in the Australian Financial Review on 15 March 2023.

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