Prime Minister Anthony Albanese has announced that the tax on superannuation earnings for balances over $3 million will double from 15 per cent to 30 per cent in two years’ time.

The move will bring the government an extra $2 billion in tax revenue a year, and will affect the top 0.5 per cent of Australians with large super balances.

The opposition has ruled out supporting the changes, saying Labor is “coming after” Australians’ money. But superannuation funds say it’s an appropriate step towards ensuring the retirement income system remains sustainable.

So, what are the changes? Who will they affect? And why are they being made?

Why are we talking about this?

Compulsory superannuation was introduced in 1992 to help workers fund a comfortable retirement and to reduce reliance on the pension system. Through that forced saving system, with employers paying a percentage of worker wages into dedicated accounts, Australians have squirrelled away a total of about $3.3 trillion.

But that money is far from evenly divided. Two-thirds of Australians (66 per cent) have less than $100,000 in their super accounts, including many younger people a few years into their working life.

Other, older Australians have been accruing superannuation for much longer. Some have been able to take advantage of earlier, more generous contribution caps; and some have non-cash assets such as art and housing in funds that are self-managed.

A very few Australians – just 0.5 per cent of the population – have $3 million or more in their accounts.

There are 6000 people with more than $10 million, and as Albanese has pointed out, some of those balances are enormous. “With 17 people having over $100 million in their superannuation accounts, [and] the individual who has over $400 million in his or her account, most Australians would agree that that’s not what superannuation was for. It’s for people’s retirement incomes,” he said.

What exactly are the changes?

Unlike with income, tax rates on superannuation are relatively flat. Earnings on funds’ investments are generally taxed at 15 per cent while people are working. Once that person reaches 60, the tax rate falls to zero for earnings they make on their investments under $1.7 million.

That’s vastly different from the marginal income tax rates. There are five tax brackets – starting at zero tax for earnings up to $18,200 and, at the top end, a rate of 45 per cent for income over $180,000. So, for many higher income earners there’s a clear incentive to contribute to their retirement fund.

The government has proposed changes to the superannuation tax concessions. From July 1, 2025, it will tax superannuation earnings on balances over $3 million at 30 per cent, which is double the current rate.

Under the treasurer’s current plan, that $3 million threshold will not be indexed (meaning the level at which the higher tax will be levied won’t rise over time) to help keep the superannuation system sustainable.

What are the reasons for the move?

The prime minister and treasurer gave two main reasons: improving the budget bottom line and ensuring the tax concessions are more equitable. The federal government’s gross debt is nearly $900 billion, and spending on programs including defence, aged care, health and the National Disability Insurance Scheme is projected to continue rising. Treasurer Jim Chalmers says the super tax change will help ease some of those budget pressures.

Given the federal government’s total tax take is north of $560 billion, the extra revenue from this move is relatively modest, but Chalmers says it’s about fairness. “The cost of these tax breaks is overwhelmingly skewed towards a small number of people with high balances – with balances well beyond what’s required for a comfortable and a dignified retirement.”

Data released by Treasury has shown the vast bulk of the benefit from those concessions on super earnings goes to people with above-median incomes, and the top 10 per cent of income earners enjoy 39 per cent of the total benefit.

The prime minister says that with accounts worth millions and millions of dollars, it’s hard to argue that those levels are about actual retirement incomes. (Before the changes were made, Assistant Treasurer Stephen Jones said that for super balances in the multimillions of dollars, those accounts were clearly not just about retirement income. “It’s about tax management, it’s about estate planning but not about retirement income,” he said.)

The government has also unveiled a suggested definition for superannuation that would essentially restrict its use to retirement income. It would make it difficult for future governments to, say, unlock superannuation for a first home purchase (which is a current Coalition policy).

How many people will be affected?

Fewer than 80,000 people will be affected, and the government expects some of those to shift money or assets out of their accounts in response – though it is unclear what the benefits of that would be.

The treasurer has pointed out people might compare the super tax rate of 30 per cent to their marginal income tax rate and ultimately decide to leave the money where it is.

The government has been at pains to point out it is not coming for people’s super balances, and 99.5 per cent of Australians will be completely unaffected by the changes.

What, if any, further changes are expected?

The government very consciously decided the changes would kick in after the next election, which is due to be held by May 2025. The prime minister and treasurer say the increased tax on super earnings on balances over $3 million was their main focus, but have left the door open to announcing other tax reforms before the next election.

“There will be no changes – no changes – this term,” Albanese has said. “Even this change, what we are doing is pointing towards 2025.”

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