Super tax won’t hit wealthy investors as much as you think

Among the growing protest about going after the wealthiest superannuants lurks a massive misconception. They actually won’t be hit as much as you think.

There’s plenty of protesting but if your super fund is slightly over $3m you will not really feel a big impact from the new tax.

There’s a lot of angst about the new super tax.

It’s understandable. The government is attempting to tax profits that haven’t been cashed in. They’re paper only and at risk of disappearing, but will be taxed anyway.

But among the growing protest about going after the wealthiest superannuants lurks a massive misconception.

People commonly think the new Division 296 tax levies a flat 15 per cent on earnings, both realised and unrealised, from superannuation account balances above $3m. The logic being the government is effectively doubling the tax currently paid. This explanation is simplistic.

It is more detailed than that and to the surprise of many, it may not be as bad as initially thought. Although Division 296 is a new 15 per cent tax in addition to the existing 15 per cent tax on super balances above $1.9m, it only applies on the proportion of earnings attributable to the part of an individual’s total super balance that exceeds $3m.

Best explained by an example, say a super fund member has a $3m balance as at 1 July 2025 and by 30 June 2026 the balance increases to $3.2m.

Division 296 taxes the proportion of earnings above $3m, so in this example, $200,000 represents 6.25 per cent of the $3.2m super balance. As such, only 6.25 per cent of the increase in value above $3m is taxable at the additional 15 per cent.

The tax paid is not what some people assume, that is, 15 per cent on $200,000 being $30,000.

Instead, it is 6.25 per cent of $200,000 taxed at 15 per cent, which equals $1875. As a percentage, the Division 296 tax payable represents just 0.94 per cent. That’s a far cry from 15 per cent tax.

In other words, if your super fund is slightly over $3m you will not really feel a big impact from Division 296 tax. You need quite a bit more in super to really feel the sting.

For a $6m super balance, the effective Division 296 tax is 7.5 per cent. For a $10m super balance it is 10.5 per cent, for $20m it is 12.75 per cent and for $30m it is 13.5 per cent.

The ripple effect

But alas, once the tax comes into law it will have an immediate ripple effect. Financial advisers and tax accountants will scurry to do calculations for their wealthy clients and in many cases advise them to withdraw part of their super funds in favour of tax structures that do not attract tax on unrealised gains such as family trusts and investment bonds.

The problem is that once implemented, it will be hard to undo in the future.

Say the Coalition wins the next election and repeals the tax, what about the retirees that took money out of superannuation to avoid the tax? Many will not be able to contribute money back into superannuation due to age and contribution limits. The solution may be a special one-off window for people to add a larger one-off amount into superannuation, similar to the $1m non-concessional cap in 2016 that allowed people to transition to the new incoming superannuation rules from the Howard government. But it becomes messy. Do you allow everyone to have the larger one off contributions cap, which will cost the government billions of dollars in tax concessions, or just the people who took money out of super due to Division 296?

Another casualty is the superannuation sector overall. There is a growing level of scepticism regarding the benefits of accumulating wealth in superannuation for retirement. Every time the government adds a new tax or adds a new super restriction people question what superannuation will look like when they eventually reach retirement age. Will the government push the access age for super from 60 to 65 or even 70? Will the government further reduce the limit for tax free pensions in retirement? Or will the government introduce a death tax on any remaining super balance after we pass away?

All these things swirl around in people’s heads and instead of maximising salary sacrifice and making after tax super contributions, they may spend. This could result in people retiring with less in super and put more pressure on the government purse through skyrocketing age pension payments, which already costs over $50bn per year.

As the senate continues to consider Division 296 tax they should take note that this tax will have far reaching and long lasting implications.

James Gerrard is principal and director of financial planning firm www.financialadvisor.com.au