Nick Bruining: What you need to know about Labor’s $3m superannuation tax

Labor’s new tax on superannuation is like a form of financial cancer — there’s a real chance it could spread.

When implemented, Australia will become an outlier joining just a few countries like Switzerland and Norway in the way unrealised capital gains are taxed.

In very simple terms, for those affected by the tax, you’ll pay an extra 15 per cent tax on the balance increase in your super from one year to the next, less the money paid in or out.

If the part of your fund that’s caught by this tax has gone up by $100,000? You’ll owe the tax-man $15,000.

That’s on top of the 15 per cent tax that’s already been charged on the earnings of the fund.

If you made a loss? No, you won’t get a tax refund. You’ll be able to offset future gains with that loss. But, it appears only after the new system starts.

Making the situation even worse, is that you’ll owe the tax personally.

You’ll have the option of cashing out some of your super to pay the tax bill, but for many investors, that means cashing-in investment units or selling assets to raise the cash.

This new tax breaks a taxing principal that dates back centuries — you pay tax when you make money and have the cash to pay for it.

Earn interest at the bank? You pay tax on that income. Sell an investment property or shares? You pay tax on the actual profit you just made.

Like any tax that’s designed to bewilder, the calculations for the new tax are complicated.

Under the proposal, if your Total Superannuation Balance (TSB) is above $3 million as of July 1, you’re a target.

The TSB includes all of your super and pension funds.

For example, if you have $4 million in super on July 1, 2025 and then $4.5 million on June 30, 2026, your balance increase is $500,000.

That assumes no additional contributions or withdrawals took place.

Let’s hope you have the cash on hand to cover the debt. It’s hard to sell off a bedroom.

The proportion of those gains subject to the new tax is calculated by dividing the $4.5 million less the $3 million threshold, by the balance of $4.5 million. That works out to be 33.33 percent — and 33.33 percent of the gain works out to be $165,000 so at 15 percent, the new tax you owe will be $24,750.

Let’s say this new tax methodology leaks out of the superannuation system and is applied to a negatively geared investment property.

They might be looking at the value of the property on July 1, and get a new value on June 30 the following year. Let’s say the value is up by $100,000. As a concession they might still apply a 50 per cent discount on the gain, leaving you to pay personal tax on the additional $50,000.

Let’s hope you have the cash on hand to cover the debt. It’s hard to sell off a bedroom.

Sure, this might be regarded as a fabricated scenario designed to scare, but some experts are genuinely concerned this could eventuate.

The government argues that the $3 million threshold will only affect about 80,000 people now.

But the fact that this figure is not indexed means every year, more and more people will be caught.

If part of your retirement plan is to pump up your super using super downsizer and other lucrative contribution rules, watch out. You could be at $3 million sooner than you think.

There’s something else too.

This proposed superannuation tax first appeared last year but was quashed by the crossbenchers in the Senate, including the Greens.

Part of the Greens’ argument was that the bar for the new tax was set too high. They wanted to see it lowered to $1.9 million.

And now that the Greens effectively control the Senate, watch this space.

The negotiations could very well include a lowering of the $3 million threshold, meaning even more of us will be caught.