Who cares about a tax on $3 million super balances? Maybe you should

Who cares about a tax on people with $3 million in super? They are Australia’s rich people, after all. The top half a per cent. They have accountants, investment properties and franking credits coming out their ears. Most of us will never get near that kind of money in our lifetime.

So why should we care?

Wealthy investors with large super balances will likely look for ways they can dodge the tax.Credit: Simon Letch

Well, let’s dig a little deeper. Because we, the everyday people who go to work and pay our tax the right way, actually have a lot more riding on this change than it first appears. It is time we all stood up and gave this policy a bit more thought before it gets rushed through parliament.

The government now has a free pass to legislate this tax in the first sitting of the new Senate season. And, so far, Treasurer Jim Chalmers is showing no sign of backing down.

He’s also provided very limited insight into how it will work practically, so we might end up with a tax we don’t properly understand, and one that no one wants to speak out about except the wealthy, who we all shrug and roll our eyes at.

So before we all move on, let’s take a closer look at what this tax might actually do, and why it might – one day – affect far more Australians than we think.

This isn’t a tweak – it’s a turning point

Superannuation has been one of the great Australian policy successes. For more than three decades it has helped millions of ordinary workers build wealth over time, with tax incentives, long-term growth and compounding returns on their side.

It has turned everyday Australians into investors on the global stage. It has reduced pressure on the pension, as well as alleviated our fear of ageing impoverished. It has given people choice, dignity and financial independence in retirement.

But this tax marks a clear change in approach. It hits people for building wealth inside the system that was designed to help them do exactly that. It tells every smart investor that if your super grows too much, you will be penalised. Not when you realise the gains but while it is still just sitting there, growing on paper.

This is a sign that the government is stepping back from protecting super as our most effective long-term wealth-building tool.

It makes super harder to manage, more expensive to comply with and less attractive to contribute to, beyond the compulsory 12 per cent. And that weakens the system for everyone.

Maybe that’s actually what the government is trying to do, to slow down the use of super as a more extreme wealth creation tool and start to shape the system into an ordinary person’s retirement fund.

It’s fair to tax the rich

If you have built up millions in super, chances are you have benefited from years of compounding returns, generous tax concessions and perhaps even a bit of clever financial structuring. So, asking that group to pay a little more to help fund aged care, disability support and hospitals?

The super tax has the potential to affect the next generation of savers.Credit: Dominic Lorrimer

Most of us are fine with that. Fair is fair. If you have gained the most from the system, you can afford to give a little back. Even the wealthy people I know tend to agree with the policy.

But fairness is not just about who pays. It is also about how they are made to pay. And that is where this new super tax quietly crosses a line that most Australians don’t yet see coming.

Taxing phantom income is a dangerous shift

For the first time, under this policy, Australians will be taxed on unrealised gains inside super. That means our $3 million friends could be hit with a tax bill on the paper value of their assets even if they have not sold a thing, have not seen a dollar, and might never.

They have not cashed in; the market is still bouncing around like it always does. But they will be taxed as though the gains are real. And they will need to manage the painful-sounding administration of this and find the money to pay that tax before a single cent actually hits their bank account.

Do you think that will encourage them to keep investing in Australia? Maybe they’ll just move their funds offshore into other jurisdictions where they can pay lower tax.

This is a real problem for people investing in illiquid, long-term assets like commercial, industrial or retail property – the kinds of assets Australia needs more of. These investments do not throw off large income every year. They are held for growth, not quick returns.

Under this tax, investors will start paying for the privilege of not selling these assets, year after year. And to achieve that they will need formal valuations annually, regardless of whether they plan to hold for another 10 years.

Good news for valuers. And great news for tax havens outside super. Not so great for anyone trying to invest with a long-term view.

A compliance nightmare

If this tax goes ahead, it is not just the wealthy who will be affected, it is the superannuation system as a whole. Every fund with members over the $3 million threshold will be forced to build entirely new systems to track, and tax earnings in ways they have never had to before.

Large funds will need to calculate each member’s total super balance across every account and investment option, and do it daily. They will have to carve out the portion of earnings that relate to the balance above $3 million. That is not how the system is set up today, and members will have to pay for that to happen.

Funds will also need to revalue unlisted assets each year to comply, including property, infrastructure and private equity. And they will need to explain the results to members who may be taxed on gains they never see.

SMSFs will wear it, too. Annual property valuations, complex accounting and even asset sales, just to pay tax bills. All while trying to follow the rules of a system that was meant to reward long-term saving.

Businesses will suffer, too

Hungry entrepreneurs often get their break when a private investor backs them using their super. But the moment that investment shows promise, a higher valuation on paper, a bit of investor buzz and that investor will get taxed. Not when they sell. Not when the business earns revenue. But as soon as it looks like it might be worth something.

Even if the company is still pre-revenue. Even if it is three years from an exit. Even if it fails the year after. Why would any long-term investor back innovation if the ATO wants to clip the ticket before the return has even arrived?

It is not just a tax on wealth. It is a tax on risk, on patience and on growth. And that is exactly the kind of investment Australia needs more of.

Anthony Albanese and Jim Chalmers in Brisbane.Credit: Alex Ellinghausen

The cap that will catch you or your kids one day

And here is what should really ring alarm bells: the $3 million threshold is not indexed. That means it will not rise with inflation, wages or asset prices. So while only a small group is affected now, this tax will creep into middle and ordinary Australia within 20 years.

An ordinary worker earning an average wage of $100,000 and contributing the compulsory 12 per cent super could retire with more than $4 million after 40 years with their super invested in a growth fund with a 9 per cent annual return.

This tax will either create administrative headaches for future retirees or it will send a message: don’t bother putting more into super than you absolutely have to. And maybe that is the point.

Think about young Australians in their 20s and 30s. With four decades of compounding, rising house prices and potential inheritances, many of them will brush up against that cap whether they realise it or not.

And once they are caught in the net, they are stuck. Governments rarely walk away from a revenue stream once it is flowing. And this one either flows rivers, or the rivers move elsewhere.

One rule for them?

Here’s the part that bears a lot of confusion. Originally, I was under the impression defined benefit pensions for politicians, judges, and public servants would be exempt from the new $3 million super tax. That’s not quite right.

Under the draft legislation for Division 296, defined benefit pensions are included in the tax calculation, using special valuation methods. That means even if you don’t have a visible account balance, the tax still applies based on a notional value.

In some cases, recipients of defined benefit pensions may even face higher tax bills, because their income in retirement is not tax-free, and their tax offset is capped at around $12,000. But there’s still a grey area.

Some state-level defined benefit schemes, particularly those for judges and former state politicians, may be constitutionally protected, which could make them exempt unless legislation changes at the state level. That creates a risk of inequity, where certain high-value public pensions could still fall outside the scope of the tax.

So, while the federal system has tried to bring fairness into the frame, there are still parts of the system where the rules don’t land equally.

If this tax is really about fairness, it should apply across the board, no matter what kind of fund your pension sits in, or what level of government you worked for.

So, who should care?

Maybe all of us should. Because this isn’t just a policy change. It’s a warning. A sign that the government is stepping back from protecting super as Australia’s most effective long-term wealth-building tool.

Instead, it’s becoming a system where you save just enough, up to the line, then take your money elsewhere if you have more. Maybe even offshore.

Why not find some middle ground – 30 per cent on earnings but only when they’re actually earned? That way, people aren’t scared off using super, funds avoid an administrative nightmare, and the government still bakes itself a tidy little tax pie and keeps rich people’s money right here in the country.

Bec Wilson is the author of the bestseller How to Have an Epic Retirement and the newly released Prime Time: 27 Lessons for the New Midlife. She writes a weekly newsletter at epicretirement.net and hosts the Prime Time podcast.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making financial decisions.

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