Superannuation tax break changes

In an attempt to repair the Federal Budget and lower the overall national debt, the government is seeking to introduce changes to the way superannuation in accumulation phase is taxed over the threshold of $3 million. It is proposed that from the 2025–2026 income year, the concessional tax rate applied to future earnings for those with super account balances above $3 million will be 30%, instead of the current 15%. It will not affect those with super account balances below $3 million, which accounts for the majority of Australians.

Currently, earnings from super in the accumulation phase are taxed at a concessional rate of 15% regardless of the super account balance. It is now proposed that from the 2025–2026 income year, the concessional tax rate applied to future earnings for those with super account balances above $3 million will be 30%. This change would not apply retrospectively to earnings in previous years, and would not impose a limit on the size of super account balances in the accumulation phase. 

This measure would affect an estimated 0.5% of people who have money in Australian super accounts, or around 80,000 individuals, so the government considers it a “modest” adjustment which is in line with its proposed objective of superannuation – to deliver income for a dignified retirement in an equitable and sustainable way. 

To illustrate just how little the change would affect ordinary Australians: in the latest ATO taxation statistics (relating to the 2019–2020 income year), the average super account balance for Australian individuals is around $145,388, with a median balance of only $49,374. In addition, according to ASFA (Association of Superannuation Funds of Australia) estimates, for a comfortable retirement, a single homeowner individual aged 67 at retirement will need $65,445 per year. If that individual lives to the ripe old age of 100, their required balance would only equate to an amount of $1.5 million in super – well below the $3 million threshold proposed. 

Let’s take another example of an individual aged 65 in 2023 who is (perhaps unrealistically) hoping to retire by the time they reach the age of 67. If they had started contributing to super from 1992 (when compulsory super was introduced) and contributed up to the current concessional cap ($27,500) every year since 1992 for 33 years to the 2025 income year, they would have a capital amount of $907,500. Assuming a balance portfolio return of 6% per annum over the entire 33 years, that individual would still be shy of a $3 million super account balance, coming in at $2.8 million.

With younger Australians increasingly facing cost of living pressures, astronomical house prices, slow wages growth and uncertain international headwinds, most have no hope of contributing up to the maximum concessional cap every year and attaining a super balance even close to $3 million, short of winning the lotto or receiving a lucky inheritance. This effect is amplified for women, who are usually more likely to take time away from work, or move to part-time opportunities, in order to raise children and take on caring responsibilities. 

According to the latest Expenditure and Insights Statement released by the Treasury, government revenue foregone from super tax concessions amount to $50 billion per year, and the cost of these concessions is projected to exceed the cost of the Age Pension by 2050. With this single proposed change, the government estimates that around $2 billion in revenue will be generated in its first full year of implementation, which can be used to reduce government debt and ease spending pressures in health, aged care and the National Disability Insurance Scheme (NDIS). 

According to Treasurer Jim Chalmers, the government will seek to introduce enabling legislation to implement this change as soon as practicable. Consultation will still be undertaken with the super industry and other relevant stakeholders to settle the implementation of the measure.

“More than 99.5 per cent of Australians will continue to receive the same generous tax breaks that help them save more for retirement through superannuation. The 0.5 per cent of individuals with superannuation accounts over $3 million will receive less generous tax breaks for balances that are beyond what is necessary to fund a comfortable retirement”, Dr Chalmers said.

Superannuation rates and thresholds for 2023–2024

The Client Alert team has used the latest average weekly ordinary time earnings (AWOTE) details from the Australian Bureau of Statistics to calculate the following superannuation rates and thresholds for 2023–2024 in accordance with Subdiv 960-M of the Income Tax Assessment Act 1997.

While the concessional contributions cap of $27,500 will remain unchanged for the 2023–2024 financial year, certain other important superannuation thresholds are set for an increase from 1 July 2023.

Contribution caps

The concessional contributions cap is $27,500 for 2023–2024 (unchanged since 2021–2022). As the concessional cap is now only indexed in $2,500 increments, the AWOTE index number of 1,807.70 for the quarter ending on 31 December 2022 was insufficient to trigger an increase to $30,000.

The non-concessional contributions cap is also unchanged at $110,000 for 2023–2024 (or $330,000 under the bring-forward rule over three years, subject to the other eligibility requirements).
The CGT cap amount for non-concessional contributions is $1.705 million for 2023–2024 (up from $1.650 million).
Co-contributions
The government co-contribution “lower income threshold” is $43,445 for 2023–2024 (up from $42,016 for 2022–2023), and the “higher income threshold” is $58,445 (up from $57,016).

Super guarantee

While the current super guarantee (SG) rate is already legislated to increase from 10.5% to 11.0% from 1 July 2023, the “maximum contribution base” will rise to $62,270 per quarter for 2023–2024 (up from $60,220 for 2022–2023).

An employer is not required to provide the minimum super guarantee support for that part of an employee's ordinary time earnings (OTE) above the quarterly maximum contribution base (ie $62,270 for 2023–2024). This quarterly maximum represents a per annum equivalent of $249,080 for 2023–2024.

Super benefits

The following indexed thresholds apply for 2023–2024:

• lump sum low rate cap: $235,000 (up from $230,000);
• untaxed plan cap: $1.705 million (up from $1.650 million);
• ETP cap amount: $235,000 (up from $230,000); and
• genuine redundancy and early retirement payments – tax-free amounts: base amount, $11,985 (up from $11,591); service amount, $5,994 (up from $5,797).

Pension cap

The general transfer balance cap, which is indexed to the consumer price index (CPI) rather than AWOTE, is set to increase from $1.7 million to $1.9 million on 1 July 2023.

The “total superannuation balance” threshold for making non-concessional contributions (which is tied to the general transfer balance cap) will also increase to $1.9 million for 2023–2024.

The “defined benefit income cap” will increase to $118,750 for 2023–2024.

Source: https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/media-releases/consultation-begins-legislating-objective-super 
https://treasury.gov.au/consultation/c2023-361383 
www.abs.gov.au/statistics/labour/earnings-and-working-conditions/average-weekly-earnings-australia/nov-2022