Superannuation tax changes – mark II

Changes to the proposed super tax are wide ranging and a win for many retirees and workers approaching retirement.

National Seniors Australia (NSA) has welcomed the changes, having campaigned for fairness in our ongoing communications with Canberra.

The Treasurer, Jim Chalmers, has sought to secure support for changes to tax concessions by introducing indexation of thresholds and dumping the contentious use of unrealised gains to calculate tax liabilities.

NSA members and supporters had mixed feelings on the proposed changes, with many angry that indexation would not apply and that unrealised gains would.

In this article, we discuss the key changes before getting your verdict in our reader poll at the end, so read on.

Unrealised gains dumped

One of the most contentious government proposals was the tax on unrealised gains, which means the ATO would tax on unrealised or paper gains.

NSA joined other critics of this proposal, who were concerned that assets held inside super accounts – including homes or farms not intended to be sold for some time – could increase in value, making them liable for a tax bill even though no real income was accrued. 

NSA welcomes the government’s backdown on imposing this tax on “theoretical profits”. 

NSA CEO, Chris Grice, said this proposal would have damaged community confidence in superannuation.  

“People want certainty and not constant change to super laws. They want confidence in how super works,” he said. 

“If it gets too complex and they can’t even explain how it works, then they may not get on board and stop supporting super.” 

Lower income earners get a savings boost

Generally, super contributions are taxed at 15%, which is a lower tax rate than what applies to earnings outside of super.

The problem is, the less you earn the less attractive the 15% super tax concession is. That’s because for low-income earners, the 15% rate is higher than the income tax rate.

The current and past Federal Governments have addressed this anomaly through the Low Income Superannuation Tax Offset (LISTO).

Currently, LISTO works this way: If you earn under $37,000 a year, LISTO acts as an offset (or refund) for some of the tax your super fund deducts from your concessional (before-tax) contributions and pays to the Australian Tax Office. 

The good news is the LISTO offset/refund will increase by $310 to $810 and the eligibility threshold will increase from $37,000 to $45,000, which means it potentially will be available to more people from 1 July 2027.

The government says the change will help deliver a more secure retirement for 1.3 million Australians, of which around 60% are women, with the total number of Australians eligible for LISTO increasing to 3.1 million.

“It will benefit all earners with incomes between $28,000 and $45,000, with an average increase in the LISTO payment of $410. These earners could receive a potential benefit at retirement of around $15,000 depending on an individual’s income over their career,” the Treasurer announced.

Many of these workers will be women and younger workers, and include those working in lower paid low skill jobs, like aged care, where demand is outstripping supply.

Helping those working in jobs helping others is a positive move, and will ensure they have a more dignified retirement.

Changes to tax on earnings in super accounts above $3 million

Since it was announced in late 2023, the proposed reduction in super tax concessions for balances over $3 million has caused a lot of debate, largely because of a reluctance to apply indexation to the threshold.

While having $3 million in a super account seems like a lot of money today, the proposed reform did not include indexation, meaning that more retirees would be captured by the higher tax rate in the future.

NSA members and supporters told us that was unfair and so we called for indexation to be applied to the $3 million threshold. The government has agreed to that, and the threshold at which the higher tax applies will be indexed in line with inflation.

But that's not the last big change to the proposed policy.

In an unanticipated move, earnings on balances above $10 million will now be taxed at a higher 40% rate, a move likely undertaken to pay for indexation and the change to LISTO.

While this move is unexpected, it’s important to note that many retirees will not pay any additional tax if their super is in a pension phase product – where the tax rate on earnings is 0%.

It is also important to recognise that the initial thresholds of $3 and $10 million apply to individuals. 

Related reading: AFR, Treasury