10 Mar The objective of superannuation

You might have heard about the latest superannuation changes, and you’ll have to forgive us if we sound somewhat jaded by yet more changes.

Superannuation has been the plaything of government for a long time. We couldn’t even begin to tally the numbers of changes ourselves and our colleagues have experienced over the years. If there’s one thing that gets fiddled with more than the financial advice industry, and the legislation surrounding it, it’s superannuation.

The first thing to note, despite the media storm, the changes on increasing the tax on balances over $3 million doesn’t affect many people. The media has a phrase they like to use for many stories now: “see how it affects you”. They couldn’t use that term for this story because of how few people it truly did affect, we’re told around 80,000. In response, the media started hypothesizing about what might be next: taxing your house, changes to capital gains tax or removing negative gearing.

Either way, the proposed superannuation changes didn’t get much traction with the public because a Newspoll showed a majority of voters supported the change to increase the tax on balances over $3 million. Even those you may expect to be against the changes, such as those over 65 and LNP voters, had more than 50% in the support column.

As the media is more interested in running scare campaigns than nuance, they wasted their time with unrealistic boogeymen, such as taxing the family home. What they ignored was where this started and further possible changes that seem more realistic. A consultation paper was released by The Treasury department in February, it was entitled Legislating the objective of superannuation.

It is seeking feedback on the proposed objective, which is worded as the following: “The objective of superannuation is to preserve savings to deliver income for a dignified retirement alongside government support, in an equitable and sustainable way.

The key points Treasury are focusing on are bolded. The two most notable are “preserve savings” and “deliver income”. Here is treasury’s reasoning behind those terms:

‘Preserve savings’ refers to the principle of preservation; that is, the concept that contributions to superannuation should not be accessed unless for the purpose of income in retirement, apart from exceptional circumstances. This recognises that superannuation exists first and foremost as a savings vehicle to fund retirement and not a pool of individuals’ savings to meet other lifetime costs.

‘Deliver income’ captures the purpose of the superannuation system – to provide universal savings that are then drawn down in retirement to deliver income that support retirees’ standards of living. The focus on delivering income makes clear that the purpose of superannuation is not for minimising tax on wealth accumulation or enabling retirees to leave tax-effective bequests.

The focus on income in both instances is worth noting, especially in conjunction with each other. Lump sum withdrawals from superannuation are a part of the system, but don’t seem to figure into these reasonings.

There has always been some handwringing over lump sum withdrawals. In some quarters there are concerns they might be used strategically, or the money might be squandered on lifestyle goodies. The result being the intent to fall back on the age pension and increasing the reliance on the government.

The Productivity commission looked at this in 2015 and noted:

Lump sums are more likely to be taken by people with relatively small superannuation balances — more than 90 per cent of people with up to $10 000 in superannuation assets take their benefits as a lump sum at retirement compared to around 30 per cent of people with assets between $100 000 and $200 000.

That suggests it’s not a big deal, but the problem with those figures is they’re from 2012/13. These people were ending up on the age pension regardless. Today, those reaching preservation age would have higher balances. More importantly, those balances will be even bigger in another decade.

If someone wanted to buy a caravan, a boat, and a brand new 300 Series Landcruiser to tow both around, to the tune of several hundred thousand dollars with the intent of ensuring they end up on the age pension, it wouldn’t be the most prudent idea, but that’s their choice. Live it up.

More realistically on the lump sum issue, there’s the inflation in property prices in Australia to consider. There are now people who carry large mortgages into their 60’s, or actively plan to do so. A lump sum from superannuation is often viewed as a way that mortgage is paid off.

If the current government believes keeping money in the system, ensuring it is utilised as income means less reliance on the age pension, then lump sums may in the crosshairs. It would be a brave government to legislate that superannuation could only be used for income, but a more realistic option may be to legislate an annual dollar cap on lump sums.

This is only us hypothesizing based on Treasury’s reasonings, but as we’ve said for years, the biggest risk in superannuation is legislative risk.

Returning to what has been announced, a 30% Tax on Balances over $3 Million

Tax on earnings in accumulation phase are currently 15%.

Those with a total super balance above $3 million at the end of a financial year (forecast to begin June 30, 2026) will have earnings above the $3 million figure subject to an additional 15% tax.

Calculation of earnings, as defined by the Treasury department, include notional (unrealised) gains.

These examples from Treasury highlights how it will work in accumulation and pension phases.

Balance Exceeding $3 Million

– Warren is 52 with $4 million in superannuation at 30 June 2025. He makes no contributions or withdrawals. By 30 June 2026 his balance has grown to $4.5 million.

– This means Warren’s calculated earnings are: $4.5 million – $4 million = $500,000

– His proportion of earnings corresponding to funds above $3 million is:

($4.5 million – $3 million) ÷ $4.5 million = 33%

– Therefore, his tax liability for 2025-26 is: 15% × $500,000 × 33% = $24,750.

Calculation of earnings

– Carlos is 69 and retired. His SMSF has a superannuation balance of $9 million on 30 June 2025, which grows to $10 million on 30 June 2026. He draws down $150,000 during the year and makes no additional contributions to the fund.

This means Carlos’ calculated earnings are: $10 million – $9 million + $150,000 = $1.15 million

– His proportion of earnings corresponding to funds above $3 million is:

($10 million – $3 million) ÷ $10 million = 70%

– Therefore, his tax liability for 2025-26 is: 15% × $1.15 million × 70% = $120,750

One thing to note, those loading up on illiquid assets in SMSFs will have to plan more carefully, especially if it’s property with poor yields. They won’t have the same luxury to sell a bathroom and hold the rest of the asset. The intended consequence here might be the Government is attempting to force residential property out of superannuation due to frustration and complexity.

Our final commentary on these changes, or any future changes, is simple: we always try to make it as clear as possible that when you invest in financial markets there’s a lack of certainty. Returns don’t come in straight lines, which means the one place there needs to be certainty are the structures that are setup for investors to save for retirement within. Ongoing changes mean ongoing uncertainty.

Importantly, we exist to help people plan for their future. You can always talk to us about the about the most appropriate strategies for you and making the most of your money.

That’s one thing that won’t change.

_{This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs}