New superannuation changes from the Federal Budget

Treasurer Jim Chalmers has handed down the 2023-24 Federal Budget, and in line with expectations its focus has been on easing living costs.

With consumer prices climbing 7% in the past 12 months¹ and Australia’s official cash rate lifting to 3.85% in the week before the budget’s release²,  it was widely predicted that this year’s budget would attempt to offer relief to as many households as possible.

So what does this cost of living budget look like? Among other things, the budget includes a $3.5 billion increase for Medicare bulk billing, a $40 per fortnight increase in the JobSeeker rate, a 15% bump to rent assistance payments and energy bill support for eligible households³.

Even with this expenditure, the Treasurer expects the budget will deliver a $4.2 billion surplus this financial year – the first budget surplus since 2008⁴.

Although a surplus is on the cards, Shadow Treasurer Angus Taylor argued that for every additional dollar of revenue generated by this budget, an extra two dollars is being spent, and the Government’s own forecasts put Australia back in deficit by 2024-25.

Couched within the myriad changes proposed in this budget are also a number that may directly affect your retirement plans, specifically through changes to superannuation.

Here, we look at the superannuation changes and what they might mean for you.

What’s changing?

Super will be hit by a number of major proposed changes following the 2023-24 budget.

The first of these – a new tax applied to superannuation balances over $3 million – was in the headlines before the budget was released.

New tax on balances over $3 million

Under the existing rules, the tax on super earnings was capped at 15% while that super account was in its ‘accumulation phase’.

That meant you would never pay more than 15% on your super earnings. There was no limit on the size of the superannuation balance during this phase, although annual contribution caps applied.

Proposed changes in this budget mean that from 1 July 2025, this will no longer be the case. Instead, once your superannuation balance reaches $3 million, earnings generated from the balance above this threshold attract an additional 15% tax. These earnings include all notional – that is, unrealised – gains and losses.

This tax will even be applied to defined benefit schemes. The budget papers explained that interests in these schemes “will be appropriately valued and will have earnings taxed under this measure in a similar way to other interests”. 

Transfer balance cap increased to $1.9 million

The second major change is to the transfer balance cap. If you’re unfamiliar with the term, the Australian Taxation Office (ATO) describes it as “a lifetime limit on the total amount of super that can be transferred into tax-free retirement phase income”.

‘Retirement phase income’ typically refers to most pensions (including account-based pensions) and annuities.

The transfer balance cap limits how much super retirees can transfer into a tax-free income stream. It was first introduced on 1 July 2017 at $1.6 million⁵.

In 2021, the cap was increased to $1.7 million, in line with indexation to the consumer price index (CPI). In the past year, CPI has been tracking noticeably higher (up 7% in the year to April 2023)⁶.

While this increase in CPI has translated into higher living costs for Australians, it also means the transfer balance cap will be lifted by $200,000 to $1.9 million from 1 July 2023.

This will benefit eligible retirees and those preparing to leave the workforce as it increases the proportion of their super that can be moved into tax-free retirement income products.

Changes to contribution rules

If you’re receiving super guarantee contributions from your employer, these are also increasing (up to 11% from 1 July 2023, then 11.5% in 2024 and finally 12% in 2025).

No changes have been made to either the concessional or the non-concessional contribution caps.

They remain fixed at:

• $27,500 for concessional contributions⁷
• $110,000 for non-concessional contributions⁸. 

These rates are indexed against Australia’s average weekly ordinary time earnings (AWOTE) – a measure of average wages – and this figure has not changed significantly since the last federal budget⁹.

The bring-forward and carry-forward contribution rules remain unchanged.

Recapping contribution caps

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Concessional contributions are contributions made from income ‘before tax’, like your employer guarantee contributions. These contributions are taxed at 15%, and could incur additional taxes if you exceed the concessional contribution cap.*

Non-concessional contributions are super contributions made from income you’ve already paid tax on.

*High income earners (defined as those earning over $250,000 annually) are subject to an additional tax under Division 293 tax on their concessional contributions.

How will these changes affect me?

These changes may affect your superannuation strategy. Be aware that even though some of the changes may not directly affect you today, you may see their impact on your super later in life.

If you’re unsure how or when these changes may affect you, consider seeking professional advice. 

$3 million tax cap could affect lower balances

Based on current data, the new 30% tax on earnings from super balances over $3 million will initially apply to about 80,000 super accounts¹⁰.

While this may seem small relative to the size of the entire system, this threshold is not indexed. This means that, over time, a growing number of people are expected to find themselves on the other side of the cut-off.

Data from the Financial Services Council (FSC) suggests 500,000 current Australian taxpayers will exceed the $3 million cap in their lifetimes, including 204,000 people currently under the age of 30.¹¹ 

It would also mean the real cap measured in today’s dollars will be significantly less than it may first appear.

Consider the following three examples:

• A 35-year-old earning $200,000 with a current superannuation balance of $35,000 may reach the $3 million threshold by their desired retirement age.
• A 45-year-old earning $150,000 today with a current superannuation balance of $650,000 may reach the $3 million threshold by their desired retirement age.
• A 55-year-old earning $220,000 today with a current superannuation balance of $1,400,000 may reach the $3 million threshold by their desired retirement age.

Each of these individuals would be subject to the additional tax.

How these changes may affect you will depend on your current balance, your income, the size of your contributions, and your chosen risk profile.

As a result, it’s important to consider your own super arrangements and how you may be affected in the future. If you’re unsure about your existing super strategy, it might be worth discussing your situation with a professional.

This is especially true for those holding property inside their SMSF. The valuations of these properties will count towards the $3 million tax threshold. As this tax applies to notional gains, rather than earnings, property holdings can attract this tax even if they’re not sold.

SMSF holders will need to carefully consider the tax implications of their property holdings, keeping in mind that choosing to sell the asset may also attract additional costs such as capital gains tax or stamp duty.

What does the transfer balance cap increase mean?

If you’ve already used your maximum transfer balance cap amount, this change will not affect you. That’s because transfer balance cap indexation stops once a retiree has maximised their available cap.

This doesn’t mean you should always avoid maximising your transfer balance. As with most financial strategies, what’s best for you will depend on a range of personal circumstances and goals, and it’s always best to speak with a professional adviser when considering these options.

If you haven’t maximised your transfer balance amount yet – or are yet to start a retirement phase pension – then this latest indexation will mean an additional $200,000 can be added to your transfer balance.

This means you can move more money into the retirement phase, where it will benefit from no tax on its earnings.

Please note that a transition-to-retirement pension does not count as a retirement phase pension. This means someone currently receiving a transition-to-retirement pension can still access the higher transfer balance cap once they fully retire.

What can I do?

Remember, you always have a range of options when it comes to managing your money.

If you’re concerned about the new tax applied to balances over $3 million, there are steps you can take to help realise the retirement lifestyle you want.

The first of these is to review your income and expected earnings over your career, as well as your current super balance and any voluntary contributions you’re making to establish whether the cap might affect your retirement.

If you think you will breach the new cap, consider the tax implications and whether your current super arrangements are still appropriate for your needs.

For those close to retiring, it might be worth examining your current financial position and possibly holding off retirement until after the new transfer balance cap comes into effect.

Remember, as these are lifetime caps you could benefit from the higher $1.9 million cap even if your current savings are well below that limit.

You don’t need to transfer your balance over all at once, but every time you move part of your super into the retirement phase, that sum will count towards your tax-free cap. Waiting until the new cap comes into force will give you the opportunity to move more money into the retirement phase over your lifetime.

Remember – you’re not alone

Super is a long-term investment vehicle which most Australians will contribute to for several decades. Despite this, the government regularly reviews the rules and settings.

The impact of these changes can be immediate, or could take years to affect your super balance. Under any circumstances, you will need to consider the long-term implications and develop your strategy accordingly.

Your ANZ Private team can work with you to develop a superannuation plan that factors in your specific tax and wealth needs and, where appropriate, explores alternative structures for your assets.

Get in touch

Please get in touch with your ANZ Private team to discuss what these changes will mean for you, and how best to prepare for them.

• Talk to your ANZ Private Banker directly
• Contact us by requesting a callback

References

¹Australian Bureau of Statistics, ‘Consumer Price Index, Australia’, 26 April 2023, accessed 9 May 2023

²Reserve Bank of Australia, ‘Media Release: Statement by Philip Lowe, Governor: Monetary Policy Decision’, Number 2023-10, 2 May 2023, accessed 9 May 2023

³P Karp, ‘Federal budget 2023: Jim Chalmers delivers surprise $5bn Medicare boost and cost-of-living help for Australians ‘under the pump’’, The Guardian, 9 May 2023, accessed 9 May 2023

⁴I Verrender, ‘Jim Chalmers's budget surplus was a surprise so where has the money come from?’, ABC, 9 May 2023, accessed 9 May 2023

⁵Australian Taxation Office, ‘Transfer Balance Cap’, N.D., accessed 27 April 2023

⁶Australian Bureau of Statistics, ‘Consumer Price Index, Australia’, 26 April 2023, accessed 9 May 2023

⁷Australian Taxation Office, ‘Concessional contributions cap’, N.D., accessed 27 April 2023

⁸Australian Taxation Office, ‘Non-concessional contributions cap’, N.D., accessed 27 April 2023

⁹Australian Taxation Office, ‘Average weekly ordinary time earnings (AWOTE)’, N.D., accessed 27 April 2023

¹⁰Ministers: Treasury portfolio, ‘Media release: Superannuation tax breaks’, 28 February 2023, accessed 2 May 2023

¹¹K Adoronti, ‘Media release: distributional analysis of an unindexed $3 million superannuation balance cap’, Financial Services Council, 3 March 2023, accessed 27 April 2023