Potential Double Taxation on High-Balance Superannuation Accounts

A plan to increase the tax on large pension accounts could lead to double taxation for individuals with substantial superannuation savings, as well as certain retired officials. The proposal to increase the tax paid on earnings from super accounts worth more than $3 million from 15 per cent to 30 per cent is currently under consideration in parliament.

However, there are concerns that certain aspects of the policy, such as its application to unrealised gains and inclusion of defined pension schemes, could violate laws preventing double taxation. Under the current proposal, Australians would pay tax each year on unrealised gains on assets in their super funds, and a fund may then have to pay tax under the capital gains tax rules again when an asset is eventually sold.

This move is seen as inconsistent with existing laws which only tax realised gains and ensure workers only pay tax on earnings once, even if it involves making adjustments after initial calculations. To prevent this double taxation, a system of tax credits would need to be introduced to recognise the tax paid each year on the unrealised gain, which could then be used to reduce the capital gains tax payable when the asset is sold. This would require detailed records to be maintained each year of the amount of tax attributable to the portion of earnings represented by unrealised capital gains.

There are also concerns that these rules could mean public servants who get their retirements partly funded through government defined benefits schemes would similarly be taxed twice on some earnings. Additionally, super savers could also face a double tax if their balances exceeded $3 million and they made excess non-concessional contributions to their accounts.

The government has been criticised for its controversial plan to tax unrealised gains on earnings from superannuation balances over $3 million. The new tax could potentially affect many more Australians than initially suggested, as the measure would not be indexed.

The legislation, if passed, would establish a new tax known as a ‘division 296 tax liability’ which an additional 15 per cent tax rate on the earnings of super accounts over $3 million, proportionate to how much of their balances are over that threshold. However, parts of the sector have expressed concerns that the government has failed to take on board their concerns.

The legislation also confirmed that judges will be spared from the tax because the Constitution does not allow the government to change the remuneration of any judges in Commonwealth courts while they are still on the bench. This means that any appointed before July 1, 2025, when the new tax kicks in, are exempt. Historic rules designed to protect defined benefit schemes also exclude customers of some state public service schemes and judges from paying any additional tax from those products, though they would be included in calculating balances over $3 million.