Inflation rebound sparks concern super caps and thresholds are being left behind

The unwanted inflation surge has unnerved the superannuation sector, increasing pressure on a range of thresholds and settings.

The individual limit on tax-free super could move up again next financial year.

The surprise inflation rebound has rattled the superannuation sector. It’s revived pressure on a range of caps and settings which are not adjusted for inflation – the most notorious being the looming new tax on super balances above $3m.

An unexpected bounce in the quarterly inflation number has also reopened the prospect that the individual limit on tax-free super for all Australians could move up again next financial year. It is almost certain to move on July 1, 2025 to $2m from the current $1.9m.

Such a move would highlight what is one of the most controversial measures by the government in super which is its refusal to index the new super tax now tagged as “division 296”. This new tax of 15 per cent will be applied on balances over $3m, including movements in unrealised assets.

Inevitably, if the existing tax-free cap keeps getting indexed higher – and thanks to rising inflation it has already moved from $1.6m to $1.9m – then it will rise to overtake the new (unindexed) tax in time.

“This is a glaring inconsistency’ it’s just adding to a hodgepodge of arrangements in super where some items are indexed for inflation and some are not,” says Tony Negline, superannuation leader at the Chartered Accountants Australia and New Zealand.

Chartered Accountants Australia and New Zealand’s Tony Negline.

According to Negline, “the inconsistency around indexing of inflation is confusing and I don’t know how people can be expected to recall the settings”.

He says that even when inflation adjusting is applied on selected super caps, it can be based on different inflation criteria. For example, pre-tax contribution limits are set by wage inflation, but the tax-free limit for super’s transfer balance cap is set by the Consumer Price Index.

Now with fresh momentum in global inflation numbers, inflation indexing has become a hot issue again across super

As negotiations continue in parliament for the introduction of the new super tax, a call for the tax to be indexed is high on the agenda. There are also efforts to drop plans for the taxing of unrealised gains – also known as “paper gains”.

Liam Shorte of the Sonas Wealth Group.

According to financial adviser Liam Shorte of the Sonas Wealth group: “ It’s time for an overall review of the indexing of inflation across the tax system. Super is a good example of how badly it needs to be overhauled.”

Shorte says a range of other measures put in place inside the system have not been changed for years and it is time to allow for the extended inflation increase which has take place across the financial system.

“If you look at the super downsizer program it’s time for the $300,000 amount to be indexed,” he says. “There are examples all over the system where key amounts has not been changed for years.”

Inconsistencies relating to inflation and indexing are peppered across the wider tax system; the timing of the HECS inflation indexing once a year is already under severe criticism.

It is understood federal Treasurer Jim Chalmers will move to make changes in the area of student debt in the federal budget on May 14.

Originally published as Inflation rebound sparks concern super caps and thresholds are being left behind