Last year, in response to claims that a few wealthy people had accumulated too much in superannuation, the Albanese government proposed far-reaching and controversial legislation. From 1 July 2025 the tax rate on superannuation earnings for balances over $3 million would be doubled to 30 per cent.
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In one way it is not an unreasonable proposition, because 30 per cent is the tax rate already being paid by many companies and insurance bonds. The controversy arises from the proposal to calculate the tax on unrealised capital gains.
The controversy arises from the proposal to calculate the tax on unrealised capital gains.
There are two major problems with taxing unrealised capital gains. The first is the difficulty of valuing assets such as farms, whose value depends on a wide range of issues including weather conditions and markets. The second is that it fails to understand market volatility.
Let's say a fund invested one million dollars in tech company Nvidia, whose share price was US $262 a year ago and is now US $867, having fallen from US $943. Suppose the portfolio value was $3 million at 30 June (making up part of a member's $7.5m super balance). This is an unrealised capital gain of $2 million. Normally no tax would be paid on this at all unless the investment was sold. But the proposed new tax would apply immediately to around 60 per cent of the $2 million gain ($1.2 million).
If this volatile stock dropped back by 50 per cent after 30 June, there would be no refund available for the tax already paid. There would be a loss to carry forward against future amounts of this tax - but that's not much use for members who sell up and take their money out of super at that point.
What the government does not seem to understand is that this is a legacy issue; the big balances will all vanish as older members die. The laws have been changed so much in the last few years that it is now almost impossible to accrue a really large balance. There is now an entry tax of 30 per cent on tax-deductible contributions from high income earners, and if your balance exceeds $1.9 million you cannot make non-concessional contributions, which come from after-tax income anyway.
If the main "problem" was high superannuation balances, it could be solved simply by bringing back a modified form of compulsory cashing-out. Perhaps everybody aged 70 or more could be compelled to draw down at 5 per cent, or at the relevant pension rate on their entire superannuation balance. For example, a person with $50 million in super might have to withdraw 9 per cent of the balance at age 85, increasing to 11 per cent at age 90.
The issue is still being debated, but industry figures tell me the government is not particularly interested in any more consultation. The industry has already pointed out a strange quirk in the legislation - a person who dies on 30 June is caught by this measure but a person who dies on any other day is exempt. The government is yet to respond.
Just remember, a balance of $3 million may seem a lot now, but more and more people will be caught by the measure as time passes and inflation takes its toll. Taxing unrealised capital gains is an inherently unfair measure that should never be introduced.
Q&A with Noel Whittaker
Question
My wife and I have a large super fund invested mainly in shares, we are both 87. Would we be better to cash them in and put the cash in a term deposit.
Answer
At your stage in life, the important thing is to ensure you have enough liquidity to take care of future expenditure. If the shares are good ones and the dividends are adequate, there may be no need to sell any. Obviously, there are no age pension issues here, so you should really start to be thinking about who the beneficiaries of your estate will be when you die. It may be better to cash out your super and give it the beneficiaries sooner rather than later, compared to leaving it to them via your estate (with the potential super death tax).
Question
My wife and I are expecting our first child and we are currently putting aside $2000 a month to pay for private high school fees that will commence in about 12 years' time. The logic is that these savings are quarantined from our normal expenses, plus we won't know our income 12 years from now. We believe it's better to save now, rather than worry about how to afford the fees in the future ($40,000 a year in today's dollars or $80,000 if we have a second child).
I am 55 and no longer work, but we own our house outright. We both earn around $100,000 per year with the majority of my income from shares, bonds and cash, while my wife works full time. What would you suggest is best way to invest the $2,000 a month? The current balance is approximately $25,000. My wife is 31 with $15,000 in super - my balance is $600,000 with the maximum concessional payment of $27,500 made each year.
Answer
The best way to save is by superannuation because you can claim a tax deduction for the contributions. From 1 July you could increase your concessional contributions from $27,500 a year to $30,000 a year. If your wife contributed $2000 a month to superannuation as a concessional contribution, you would easily achieve your goal. Given the difference in ages, the best strategy would be for her to move the contributions to your account each year under the spouse contribution splitting arrangements. This would ensure the money is available in 12 years when you are 67.
Question
I am 67 and on a disability support pension, my wife, aged 62, is my carer. She is inheriting $200,000 from her fathers estate. Can you confirm this will not affect our payments if she contributes it to the Super.
Answer
If she contributes the money to super, and leaves the fund in accumulation mode, it will not be counted by Centrelink until she reaches pensionable age.
- Noel Whittaker is the author of Wills, death and taxes and numerous other books on personal finance. Email: noel@noelwhittaker.com.au.
- This advice is general in nature and readers should seek their own professional advice before making any financial decisions.