Considerable attention has been drawn towards Australia’s superannuation system, and the potential need for legislative and regulatory amendments.

Commencing with the introduction of the Superannuation Guarantee Legislation in 1992, the Australian superannuation system stands today at approximately $3.3 trillion. When comparing other retirement systems from around the world, Australia’s superannuation system ranks highly, attaining a position within the top six out of 44 countries.

Currently, profits derived from investments in superannuation are subject to a tax rate of 15%, lower than many individual income tax rates.  Recently, Australian Treasurer, Dr Jim Chalmers, announced an increase in the tax rate to 30% for workers whose superannuation account balances exceed $3 million. This article appraises the details of the announcement and looks at potential impacts on various issues pertinent to the superannuation system.

For those new to the concept of superannuation, it is a legal investment structure that allows Australians to accumulate a portion of their wages, specifically 10.5%, in a tax-efficient framework throughout their working lives. Superannuation is the accumulated savings and earnings that may be utilised to support one’s livelihood during retirement, potentially obviating the need to access the government pension system. At retirement, individuals may deploy their individually owned retirement funds as an investment portfolio, which can yield income during their post-employment years to finance living expenses. The Australian superannuation system seeks to create generations of retirees who are financially independent which, in turn, reduces pressure on the federal government to allocate funds towards future pension disbursements.

The social compact of superannuation

The social compact of super between the Australian government and the workforce can be characterised as follows: Australians are legally obligated to save a fraction of their wages in a superannuation fund, which accrues over the course of their working life. In return, the Australian government incentivises workers by instituting a low-tax regime for superannuation, whereby it is typically taxed at a rate of 15%. The trade-off for workers is that individuals are generally not permitted to withdraw their savings until they retire (or unless there are specific extenuating health-related circumstances).

The February announcement by Chalmers proposed that individuals possessing superannuation balances more than $3 million will be subjected to a higher tax rate of 30% on their super earnings, in contrast to the established rate of 15%. The proposed change would apply in the 2025-2026 financial year. The Treasurer offers three underlying justifications for this proposed change in the superannuation system. Let’s review each of these reasons.


Mitigating the loss of tax revenue

The first rationale for the proposed change is to mitigate the loss of tax revenue in the federal budget, bolstering the government’s fiscal position. Essentially, earnings that fall outside of superannuation are subject to an individual’s marginal tax rate (with the highest marginal taxation rate is currently set at 45%). Conversely, earnings that accrue within the superannuation system are subject to a lower tax rate of 15%. Corporations, on the other hand, typically pay a corporate tax rate of 30%. The proposed change seeks to diminish the level of subsidisation on superannuation for individuals possessing balances over $3 million by levying a 30% tax rate on earnings, which is comparable to the corporate tax rate. This revision to the superannuation system is expected to assist the government’s fiscal position today and in the future. Nevertheless, the government has yet to propose changes to several other areas within the federal budget that operate within a tax concession framework. From a political perspective, the adjustment of tax rates for individuals with a $3 million account balance represents “low hanging fruit” in reducing tax concessions without impinging on a significant portion of the voting population.

” … the adjustment of tax rates for individuals with a $3 million account balance represents “low hanging fruit” in reducing tax concessions without impinging on a significant portion of the voting population.”

Piggy Bank

Drilling down on the $3 million figure

The second justification pertains to the fact that a negligible proportion, specifically less than 0.5%, of Australian superannuation members, totalling around 80,000 individuals, possess account balances exceeding $3 million. Therefore, it follows that the proposed increase in the super tax rate would have no bearing on 99.5% of the tax paying public. However, two issues remain unresolved. Firstly, the Australian Treasury document states that details have not yet been finalised for the treatment of the new 30% super tax for defined benefit (DB) superannuation members. There is a significant proportion of employees in the public service and university sector who fall within the DB category of superannuation. Secondly, the $3 million threshold is a constant dollar value, and is not indexed. The medium-term effect of inflation, wages growth, investment returns, and contributions will push a greater number of Australians above this threshold over time and will be subject to the higher tax rate. On 6 March 2023, the Australian Finance Minister Katy Gallagher stated to the media that Treasury has estimated that one in ten workers will be impacted by this proposed change in super tax. This comment suggests that both the Treasurer and Treasury are fully aware of the impending super tax creep embedded in the new proposed increase in super tax. The Treasurer has dismissed this issue by suggesting that a future government can simply revise the legislation and raise the $3 million threshold, but this would entail further tinkering of the Australian superannuation system in the future. A more prudent approach would be to index the $3 million figure in accordance with Australia’s inflation rate, thereby mitigating the expected super tax creep over time.

“A more prudent approach would be to index the $3 million figure in accordance with Australia’s inflation rate, thereby mitigating the expected super tax creep over time.”

Longevity Risk

Longevity risk

The third rationale presented by the federal government is that Australian workers possessing balances of over $3 million no longer require government tax concession assistance to amass a retirement fund. The argument offered by the government is that $3 million is a sufficient sum for sustaining oneself during retirement. However, the COVID-19 pandemic and its precursory financial landscape revealed that risk-averse retirees faced substantial difficulties in generating investment income, particularly when the Reserve Bank of Australia (RBA) cash rate ranged from 0.1% to 1.50% for several years. Self-funded retirees encountered difficulties in accruing sufficient income from their investments. Research related to retirement planning reveals that retirees are exposed to “longevity risk,” that is, the prospect of outliving one’s retirement nest egg due to living longer than anticipated and the prospects of unexpected health/aged care costs in the future. Therefore, allocating investments towards inflation-beating assets becomes necessary. Retirees are usually disinclined towards taking moderate to high levels of investment risks and are hesitant to devote a significant portion of their retirement savings to such investment vehicles. Consequently, retirees opt for safe but low-yielding assets such as cash, term deposits, or government bonds. In a low-interest-rate environment, a risk-averse retiree with a balance of $3 million confronts difficulties in generating income during their retirement phase and may be constrained to apply for government assistance or deplete their savings to meet their living expenses until there is a change in investment market conditions. 

For several years, government, industry and academic research have pivoted to emphasise the essential importance of superannuation as a means to generate retirement income, yet we are back in the policy arena making changes to super account balances rather than forming new policy surrounding the level of retirement income you will generate from superannuation.


Professor Robert BianchiDr Robert Bianchi is Professor of Finance at Griffith University. He is the Director of the Griffith Centre for Personal Finance and Superannuation (GCPFS). Robert’s research expertise is in the areas of asset allocation, superannuation/retirement, investments and alternative assets (commodities and infrastructure). He has collaborated in research projects with partners including the CSIRO, Australian Research Council (ARC), Asian Development Bank (ADB), EDHECinfra (Singapore) and the Indonesian government. 

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