Albanese’s Senate majority clears path for $3m super tax reform

Among the many things that changed due to Prime Minister Anthony Albanese’s overwhelming election victory is the environment in the Senate.

With Labor set to increase its Senate numbers, it will now only need support from the Greens and their senators to get legislation passed.

Difficult and unsuccessful negotiations in the previous term with crossbenchers such as David Pocock and Jacqui Lambie should now be a thing of the past.

One of the first targets for this newfound legislative freedom will be to pass the so far stalled plan to double the tax on the earnings from $3 million-plus superannuation accounts, including unrealised gains.

Super plan set for urgent passage

Given that the plan is due to begin in the new financial year, it will now become one of the most urgent and important early steps for the government to implement as part of its second term agenda.

Hopefully there will be some wriggle room for the Greens to push for some changes to this tax, the most important being the fact that the $3 million limit is not indexed and the other being that that it will apply to unrealised gains.

However, any compromises may be two-way, with the Greens wanting to push the limit down to $2 million and also likely to push for further action against Trusts and other means used by the wealthy to reduce tax bills.

Prime Minister Albanese has already indicated that the Greens are unlikely to get any movement on the $3 million cut in point but other options for the Greens might pop up in negotiations.

How the proposed tax would work

Under the proposed new law, the so-called Division 293 contribution tax of 15% will apply to the proportion of an individual’s superannuation balance above $3 million at the end of the financial year.

The tax will be levied directly on individuals and imposed separately to personal income tax and superannuation fund tax.

That means that the individual can elect to pay the tax personally, or elect to pay the tax from their superannuation account balance.

While the Albanese Government will need to get its skates on to get the Bill through the Senate in time to apply to the 2025/26 year, there is no need for urgent action by people who are lucky enough to have more than $3 million in their superannuation account.

That is because the tax will only apply to the superannuation balance at the end of the 2025/26 year, so there is plenty of time for any changes.

Exactly what form those changes will take is a matter of conjecture and we will need to see the final legislation before any strategies can be determined.

At this stage the plan seems to be to introduce the legislation when parliament is recalled in August, with the new measures needing to be applied retrospectively.

It is not possible to pass the measures before then because the old Senate would reject the bill, which is budgeted to raise $2.3 billion in its first full year of operation.

Lack of indexation is a big problem

Given that the amount of superannuation that can be rolled over into the drawdown pension phase is about to rise to $2 million due to indexation, the 0.5% of people with super to which the new tax would apply can be expected to rise over time unless the $3 million cap is also indexed to inflation.

For those already in the drawdown or pension phase of their super, avoiding payment of Division 296 tax would be as simple as withdrawing the amount that was above $3 million.

For those whose superannuation is still in the accumulation phase, avoiding or reducing a possible tax bill will be more difficult, depending on the exact wording in the new legislation.

ASFA backed the tax, with reservations

Before the election, the Association of Superannuation Funds of Australia (ASFA) backed the introduction of the Division 296 Bill, which would double the tax on the amount of super balances exceeding the $3 million threshold.

ASFA argued that the tax can effectively ensure fairness in super tax concessions but also argued that the existing Low-Income Superannuation Tax Offset (LISTO) to protect low-income earners should be maintained and enhanced.

At the time ASFA chief executive Mary Delahunty said the tax on earnings on assets above $3 million was “a worthwhile pursuit”, although she added that the bill in its current shape “obviously has some hairs on it.”

“I’m not as concerned about the taxation of unrealised capital gains as some other commentators are, I think we’re all familiar with land tax, which is also a taxation system that is based on unrealised capital gains,’’ Ms Delahunty said.

“Whether or not that means you need to pay the tax at the time, or whether there should be some reform done to that bill that would see a debt held over. Those are the sorts of issues I think an incoming government might want to tackle if they want to bring more equity to the tax incentives in superannuation.”