Sarah Forman’s take on the latest in tax changes to super
Watch Sarah Forman, our Group Executive for Advice share her thoughts on the proposed legislative changes to tax rates on super.
Sarah Forman: We're always keen to help our clients and the members of Aware understand some of the dialogue that happens in the media around superannuation and retirement. It's such an important life stage for our members and clients and we're here as a professional team of advisors to help them understand what's going on and what changes are being proposed. The ones that you may have read about are the introduction, potential introduction, of a change in the tax rate for savings and earnings above $3 million, and that's not proposed to come in for a couple of years yet until July 2025. And there's also dialogue around the purpose of superannuation.
Our team of professional financial planners are here to really help our clients understand all the opportunity that exists within the scheme and the framework of superannuation to set themselves up for their best retirement. Whether that is understanding how they minimise taxes on assets they may have outside of super, how they protect their children and their dependents, non-dependents, from the tax they may have to pay when they inherit estates or even as a retiree, there's changes to the levels of work hours that are required to be able to still continue contributing to superannuation. So our professional advisors are really here to understand every client's individual circumstances and help them navigate the choices that they have so they can feel really confident about their retirement once they get there and also the journey to get there.
Get an update on what’s happening with super rules
Iby Ibrahim, our Advice Strategy Expert, explains what’s new in super and what the government announcement about tax for accounts over $3M really means.
Death and (super) tax
Who it’s for: people who have a taxable component in their super and can access their funds
It’s often said the only certainties in life are death and taxes. When it comes to super, you could still be paying tax after you die. However, there are things you might be able to do now to reduce this tax bill and pass more onto the next generation.
A super death benefit tax is generally only paid when you are passing your super onto your non-dependents, like adult children. Your dependents, like your partner, usually won’t have to pay this tax.
Not all of your super is taxable. Your super is made up of a taxable and a tax-free component. The tax-free component is the amount you’ve already paid taxes for, like after-tax contributions. This typically isn’t taxed when you die.
However, the more common pre-tax contributions, like the employer paid superannuation guarantee and salary sacrifice contributions, are included in the taxable component and may be subject to up to 17%* tax when you die.
If you have a taxable component in your super and can access your super, there may be opportunities available to you to reduce this tax. We recommend discussing these with your planner at your next appointment, to understand the implications and how these could affect your goals.
In July 2022, the Government abolished the work test allowing eligible retirees under 75yrs to make after-tax contributions. This means people who are eligible could withdraw some of their super and then put it back into super as an after-tax contribution. Any of the taxable component of your withdrawal, will then become tax-free when you make the contribution.
How much you can contribute will depend on the exact value of your total super and pension balance. If your balance is under $1.7m, you may be able to contribute $110,000. If you have a balance less than $1.48m, you may be eligible to bring forward the next 2 years of contributions and put up to $330,000 into super this year.
If you’re turning 75 soon, we suggest meeting with your financial planner before then, so you can take advantage of this opportunity before you turn 75.
Whilst this might reduce your tax bill on your super when you die, the earnings on investments outside super could be taxed at a higher rate than inside super and may also attract additional taxes like Capital Gains Tax depending on how you invest.
Some people may want to take the risk and wait until just before they die to withdraw the money then.
If you are considering any of these strategies, we recommend talking to your financial planner first to understand the impact on your other goals and any implications or rules you need to be aware of.
Transfer Balance Cap increase to $1.9m
Who it’s for: anyone starting a retirement income stream
For anyone starting their first retirement income stream, there is a limit on the amount that can be transferred into your income stream or other retirement phase account. This is called the transfer balance cap and on 1 July 2023, is expected to increase from $1.7m to $1.9m.
Unfortunately, people who’ve already used up the existing $1.7m cap won’t be able to benefit from the increase in the cap. However, those that haven’t used up their entire cap could benefit from this increase. If you’re thinking about moving more money into retirement phase we recommend talking to your financial planner to ensure you maximise your benefit and don’t breach any rules.
Tax on super over $3m
Who it’s for: people who have a super balance over $3M from July 2025
There’s been a lot of media attention about the government’s plan to increase tax for Australians who have a total super balance over $3M. This change is only a proposal and won’t come into effect until at least 1 July 2025, if it is passed into law. Below shows a breakdown of the changes to better understand how the super will be taxed.
The government has proposed applying an additional tax of 15% on earnings from super above $3M. This means if your total super balance is over $3M on 30 June 2026, the earnings on the first $3M will continue to be taxed at up to the current 15% rate. It is the earnings on the amount over $3M that is proposed to attract an additional 15% tax, adding up to 30% tax on these earnings. In a nutshell, the extra 15% tax doesn’t apply to all earnings, just earnings from the amount over $3M at the end of the financial year. Note, defined benefit income streams will remain tax free.
This is still just a proposal, and the government has indicated it won’t be legislated until after the next election. If and when it is passed into legislation your financial planner will be able to determine how you might be impacted and what options you have.
Disclaimer
This is general information only and does not take into account your specific objectives, financial situation or needs. Seek professional financial advice, consider your own circumstances and read our Financial Services Guide, any relevant product disclosure statement & Target Market Determination, before making a decision. Call us or visit our website for a copy.
Issued by Aware Financial Services Australia Limited (ABN 86 003 742 756, AFSL No. 238430), wholly owned by Aware Super (ABN 53 226 460 365) whose trustee is Aware Super Pty Ltd (ABN 11 118 202 672, AFSL 293340). For customer service please call 1800 620 305.
^When you withdraw money from super, you can’t pick which component (tax-free or taxable) you withdraw from. Your super fund will process any withdrawal according to the existing proportion of each of these components.
*This could be as high as 30% for people who have an untaxed element, within regular accumulation accounts an untaxed element could arise if you held Death cover within your account and the proceeds were added to your super.