Date posted: 17/05/2023

The long-term impact of Labor’s new superannuation tax

Better Targeted Superannuation Tax Concessions will do real harm to retirement savings over long-term

In brief

  • Difficult to predict timing of tax payments so planning will be essential
  • Choice of how tax is paid makes substantial difference to end benefits
  • Administration of tax will create headaches for practitioners

What happens to superannuation fund member’s end benefit when they have to start paying the new Better Targeted Superannuation Tax Concessions (BTSTC) tax from 1 July 2025?

Here we unpack the results of the modelling work completed by CA ANZ which has helped shape our feedback to the recent Treasury consultation on this new tax measure. 

The modelling is in two parts – one looks only at asset prices movements and the second considers income, expense and income tax and capital gains tax (CGT) impacts.

What is BTSTC tax and how is it calculated?

For additional background information on this measure read the Treasury consultation paper issued in April 2023.

Treasury consultation paper

Treasury paper detailing its initial thoughts on how the BTSTC tax will be designed

Read paper

Client scenario and assumptions

For this case study, we assume that a super fund member finds themselves with a $3 million account balance. Where relevant the additional tax is charged at 15%.

We assume that the balance under $3 million is taxed at 15% - assuming some of this money is in pension phase and taxed at 0% increases complexity in the model. We may do that analysis at a later date and report our findings.

Asset price movements analysis

As an investment we have assumed that there are no changes to asset holdings. That is, there is no trading and hence CGT has not been taken into account.

In this analysis we have assumed that there are no management or administration fees.

The investment is assumed to be made in the ASX 200 All Ordinaries Index for the period between July 1980 and June 2022 – that is 42 years.

We have then determined how much BTSTC tax is payable for that period of time, assuming the tax is not paid by withdrawing money from the superannuation account.

As the BTSTC tax is payable after the end of each year we only need to track investment returns once a year. Movements on a daily or other frequency such as monthly are not required.

The annual returns over the investment period are as follows:

ASX

The index movements as well as increases in Average Weekly Ordinary Time Earnings are as follows:

Average Weekly Ordinary Time Earning

We acknowledge that very few people will have such a large amount invested in the accumulation phase for 42 years. This period has been used to show when and how much of the BTSTC tax will be payable.

We have assumed no administration or other costs are payable. Income tax factors have not been taken into account. It also assumes that no income is earned by the fund.

What this analysis shows is that the tax is very lumpy. The tax is payable in only 18 of the relevant financial years which is less than 50% of the relevant financial years. More than 50% of the total tax payable under this measure is paid in four financial years as shown in this graph.

The variability can be expressed by two important statistics – the average tax payable over 42 years is $210,000 but the median is $126,000.

Variability Graph

Asset price movements, normal super fund income tax, franking credits and CGT

Now let’s change our parameters and increase the complexity of the case study to be more realistic.

For this we would like to see what happens when other tax impacts such as normal super fund tax, franking credits, CGT and the payment of BTSTC tax from the fund itself is applied.

This time we will assume the investment is made into the ASX 200 All Ordinaries Accumulation Index between July 1982 and June 2022 – a 40 year period. What is an accumulation index? Such indices assume that dividends are reinvested and so measure both growth and dividend income.

By using both the ASX 200 All Ordinaries Index and the ASX 200 All Ordinaries Accumulation Index we are able to work out what dividends have been paid by companies listed in these indices each year.

For the sake of our analysis we have assumed that current tax policies apply throughout – that is, companies listed on the ASX 200 pay a 30% corporate rate, dividends are frankable and fully refundable to superannuation funds, super funds pay CGT at 10% (that is two thirds of 15%). We have assumed that 75% of dividends paid is eligible to be franked and any franking credit refunds are reinvested into the ASX 200 All Ordinaries Accumulation Index.

Here we look at two different types of cases – one where BTSTC tax is not withdrawn from super and the tax liability is paid by the individual and the other where it isn’t. We also look to see what happens when the $3 million threshold is indexed. When the BTSTC tax is paid out of super fund savings we have assumed that the tax liability is paid in the next financial year and CGT is paid at a 9% rate. This rate has been selected as a proxy to allow for relevant transaction costs and because in some cases assets may have suffered a capital loss on disposal.

In both cases we have assumed no administration fees. The end results are as follows:

Franking Credits Table

The end benefit does not assume any lump sum withdrawal tax has been paid and is based on future dollars.

Lump Sum Withdrawal Graph

The graph shows that the BTSTC remains extremely lumpy when the $3 million threshold will and will not be indexed. Compared to the example shown above, the BTSTC tax was payable in 30 of the 40 years and it remains highly variable from one year to the next. In both cases more than 60% of the total tax payable in just seven financial years.

The graph implies that the benefit of indexing the $3 million threshold is quite muted. However, without indexation more tax is paid in the early years of the example and this has a tangible impact on the end benefit. The “with indexation” end benefit is 13.6% higher than the “without indexation” end benefit.

On an inflation adjusted basis, when the $3 million threshold is not indexed then a total of $10.5 million of BTSTC  tax is paid compared with $10.2 million paid when the threshold is indexed.

These examples clearly show that from a retirement benefit system perspective it would be better for taxes to be levied when a benefit is taken as opposed to during accumulation.

Franking credits not fully refundable

Rumours in the superannuation space seem to survive for a long period of time and one of those rumours is that at some point the Government will no longer allow franking credits to be fully refundable for superannuation funds.

Before the 2012 Federal Election, the then Opposition Leader disavowed a range of former ALP tax policies including limiting access to franking credit refunds for a range of taxpayers include superannuation funds. At present we do not believe the Government intends to change this policy.

Nevertheless, we have modelled what end benefits would look like if franking credits ceased to be fully refundable.

Franking Credits table

If the BTSTC tax is not taken out of a superannuation account then when franking credits are not fully refundable, the end benefit is 18% lower than if they are fully refundable. When the BTSTC is taken out of the system then the end benefit is 15% lower than when franking credits are refundable.

As with the examples where franking credits are fully refundable, more than 60% of the total BTSTC tax is payable in just seven financial years.

How will super fund members decide how the BTSTC is tax paid?

Based on the above numbers it appears that many would want to pay the BTSTC tax personally.

For some they will have no choice, they will have to use their superannuation savings to pay this new tax.

But who pays this tax is not an easy decision.

A concern we have is that accountants in public practice that do not have an Australian Financial Services License (AFSL) or are not an authorised representative of an AFSL would be permitted to discuss with a client their options and the financial impact but could not make a recommendation as this would typically be seen as partially disposing of a financial product.

Equally recommending to an individual that this tax should be paid personally may also be seen as providing financial product advice.

It is for these reasons that CA ANZ believes the regulations around what accountants can and cannot change needs to be adjusted to allow those who are suitably qualified to provide clients with an appropriate service.

CA ANZ response to Treasury consultation paper

See how CA ANZ responded to the Treasury BTSTC tax consultation paper.

Find out more

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