What are the estate planning implications of the proposed “$3m super tax”?

Following our article published in 2023 on the proposed superannuation tax increase, the government has now released detail on the (as yet) unlegislated taxation of earnings on an individual’s total super balance over $3m.

The additional tax – how it will apply

The calculation of ‘earnings’ is complex and requires accounting advice but for simplicity, earnings are effectively the movement in value of the individual’s balance – adjusted for withdrawals and contributions – and (controversially) includes unrealised gains.

Once legislated, the additional 15% tax will come into force from 1 July 2025 and affect the 2025/26 and subsequent financial years. The $3m limit is static – it will not be indexed. Within the superannuation fund, balances on earnings less than $3m will continue to be taxed at the concessional rate of 15%.

The proposed new tax will be levied on the individual/member. It will not be able to be reduced by deductions, offsets or losses. A member can apply to release funds from super to pay the tax.

This is likely to create particular issues for self-managed super funds (SMSF) that have lumpy assets like business real property, or assets that are not readily able to be realised.

How the additional tax will impact reversionary pensions

Reversionary pensions are usually put in place when the pension income stream commences.

The effect of a valid reversionary nomination is when the member passes away, their reversionary beneficiary (usually a spouse) will continue (automatically) to receive their tax-free income stream, which doesn’t count toward the beneficiary’s transfer balance account for 12 months after the member’s death. In other words, two potentially tax free income streams can apply (where the pensioner or recipient is over 60 years) until the beneficiary withdraws or commutes their own pension back to accumulation.

The hitch with the new legislation is that although the additional tax will not apply to the deceased member in the year of death, it immediately counts towards the receiving beneficiary/spouse’s total super balance account. This could tip the recipient’s total superannuation balance over $3m at the next 30 June, in which case the proposed new law would apply. The reason for the difference is that the 12 month delay applies to the transfer balance cap (the maximum allowable pension) whereas the new tax applies to the individuals total super balance (which is a different definition and is calculated at 30 June each year).

For example:

Homer and Marge Simpson have a self-managed super fund with $3.5m in total assets.

Homer’s total super balance on 28 June 2025 when he passed away was $1.9m (including $1.7m in pension and $200,000 in accumulation). Homer had nominated Marge as reversionary beneficiary when he established his pension account.

Because Homer’s total super balance is under $3m, the additional tax is not applicable – and even if his total was over $3m at 30 June in the year of his death, he would be exempt because of his death.

Prior to Homer’s death, Marge’s total super balance is $1.6m (all in pension phase). But as reversionary beneficiary of Homer’s pension, Marge’s new total super balance at 30 June 2025 is now $3.3m, representing both her and Homer’s pensions, tipping her above the $3m threshold.

Planning options to prepare for the new tax

The new tax requires a re-think of:

  • The pros and cons of keeping benefits in superannuation long term. That is a complex question that needs to consider tax, asset protection and estate planning considerations.
  • Whether reversionary pensions are appropriate in all circumstances.

Although the legislation takes effect from 1 July 2025, advice should be sought early to leave enough time to implement any changes prior to that date.

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Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to you or your organisation.