If your super balance is comfortably under $3 million, you can breathe easy for now. These changes are unlikely to affect you. However, if your balance is approaching or has already surpassed this figure, it’s time to understand what’s coming.
The government has revised its plan to reduce tax breaks for large super balances, making it fairer and more practical. Let's break down what these changes are and what they could mean for your retirement savings.
What’s changing with super tax?
Previously, the government proposed a new 15% tax on all earnings for super balances over $3 million. This included "unrealised gains," which are profits on assets like shares or property that you haven't sold yet. Imagine getting a tax bill for an increase in your home's value, even though you haven't sold it. That was the major concern with the initial plan, and many people were worried about how they would pay tax on money they hadn't actually received.
After listening to feedback, the government has updated its approach. The new model completely removes unrealised gains from the calculation. Now, the extra tax will only apply to realised earnings, which includes actual income and the profits you make when you sell an asset. This is a much more practical system that aligns with how tax usually works.
A new tiered system for high balances
The updated rules introduce a two-tier system for taxing earnings on balances over $3 million. This new tax is often called the Division 296 tax.
Here’s how it works:
- Tier 1 ($3m – $10m): Earnings on the portion of your balance in this bracket will be taxed an extra 15%, bringing the total tax rate to 30%.
- Tier 2 (Over $10m): For the portion of your balance above $10 million, earnings will be taxed an extra 25%, resulting in a total tax rate of 40%.
Both of these thresholds will be indexed to inflation each year, which is a positive step to prevent more people from being pushed into these brackets simply because of rising prices.
The start date for these changes has also been delayed to 1 July 2026. This means the first time anyone would see a tax assessment under these rules would be in the 2027-28 financial year. The government estimates that less than 0.5% of Australians will be affected by these changes, so it truly is targeted at those with the largest super balances.
How it works in practice
Let's look at a couple of simple examples to see how this tax is applied.
Imagine Megan has a super balance of $4.5 million. The portion of her balance above the $3 million threshold is $1.5 million, which is one-third of her total balance. If her super funds generate $300,000 in realised earnings for the year, the extra tax would apply to one-third of those earnings. Her additional tax would be $15,000 (15% tax on $100,000 of earnings).
Now consider Emma, who has $12.9 million in super and earns $840,000. She falls into both tiers. She will pay the extra 15% tax on the earnings related to her balance between $3 million and $10 million, and an additional 10% on earnings from the balance over $10 million.
The ATO will calculate your total super balance across all your funds to determine how much of your earnings are subject to the new tax.
Good news for most people
For the vast majority of Australians, these changes are a relief. By excluding unrealised gains, the new plan avoids major headaches around asset valuations and the stress of finding cash to pay a tax bill on unsold assets. This is particularly helpful for those with property or unlisted assets in a self-managed super fund (SMSF).
While the rules are fairer, individuals with balances over $10 million will face a higher tax rate of 40%. This might prompt some to reconsider their long-term investment strategies. It's also important to remember that these changes are still proposed and haven't become law yet, so details could still be adjusted.
A boost for low-income earners
At the other end of the scale, the government is also making positive changes for low-income earners. The income threshold for the Low Income Superannuation Tax Offset (LISTO) will increase from $37,000 to $45,000 from 1 July 2027. This change is designed to ensure people on lower incomes aren't paying more tax on their super contributions than on their take-home pay.
What should you do now?
While these changes are still a couple of years away, it's never too early to plan.
- Check Your Balance: Take a look at your total super balance and estimate where it might be by 2026.
- Seek Advice: If you think you might be affected, now is a great time to get professional advice. A clear strategy for managing assets and timing sales could make a significant difference.
- Stay Informed: The draft legislation is expected in 2026. Things can change, so keep an eye out for updates.
Understanding your superannuation is key to a comfortable retirement. If you have questions about how these changes might impact your financial future or want to start planning, chatting to someone at LEAD is a great first step. We can help you navigate the rules and make sure your strategy is working for you.
