Large superannuation balances will have tax concession removed

The federal government has announced its intention to change the tax concessional status for very large superannuation accounts. The tax concessional status will change for individuals with over $3 million in their total superannuation balance (TSB).

Effectively, the amounts held in superannuation above $3 million will have that portion’s investment earnings taxed at 30% instead of the current 15%. This new tax rate will apply from 1 July 2025.

As a result of this announcement, there will be no adjustments in the future to have a maximum limit in superannuation.

How will this work?

From 1 July 2025, if your TSB is over $3 million, the ATO will issue an assessment for the additional tax after year-end. The tax will be calculated on the difference between your TSB for each income year, adjusted for withdrawals and contributions.

The proportion of earnings above $3 million will be subject to the additional 15% tax. As the tax is calculated on your TSB, this will include unrealised movements on your investments.

Pensions and the transfer balance cap

Currently, amounts held in superannuation above your transfer balance cap are kept in the accumulation phase and taxed at 15%. This will continue to apply after 1 July 2025, except if your total account is over $3 million. If your account is over $3 million, then that portion will be taxed at 30% rather than 15%.

For example, assume you have a TSB of $5 million on 30 June 2025, which grows to $5.5 million on 30 June 2026. As part of your pension, you withdraw $100,000 and a further $100,000 as a lump sum from the accumulation account.

Your annual earnings is $700,000, $5.5 million less $5 million plus $200,000 withdrawn.

The proportion of your earnings that is subject to the additional tax is 45.45%, being ($5.5 million - $3 million) ÷ $5.5 million. The additional tax liability under this law is $47,722, being 15% × $700,000 × 45.45%.

The Commissioner of Taxation will then issue you an assessment to pay the additional $47,722, and you will have the choice to either make this payment from your superannuation account or personally.

What can I do?

As this announcement states that any new law will not take effect until 1 July 2025, you have over two years to determine the appropriate action to take. Each action will be different and must be based on your personal and financial situation, but available actions may include the following:

• Do nothing and leave the large balance in superannuation with a 30% tax on earnings.

• Pay a lump sum (at varying tax rates) to yourself for private investment (individually or in a company).

• Realise assets prior to the commencement of new law, taking advantage of lower tax rates for a portion of the gain.

At this stage, the announcement has gone out for consultation. We will keep you informed of any progress of the legislation when it comes to hand.