Think you may not be caught by the excess super tax – then read on.

The announcement as to levying extra tax on those people with total super balances over $3,000,000 has certainly caused a stir.

Treasury has already worked out how the system will work (contrary to what the Deputy Prime Minister said on the Friday morning TV news).

So let’s explore how quickly people will start to pay this tax given the threshold will not be indexed.  And to put it into perspective let’s first look at the time value of money.

$3,000,000 may sound a lot today – but you could buy family home in many parts of Melbourne 30 years ago for less than $100,000.

And look at it this way:-

• In 2013 Labour was floating exempting the first $100,000 of a super pension being paid from an accumulation (not to be confused with the extremely generous defined benefits that politicians and senior public servants received – which have escaped the current round of fire).
• In 2016, the then reigning Liberal government introduced a Transfer Balance Cap (TBC) of $1,600,000 – being an indexed maximum amount you could have in pension mode). $1,600,000 earning a modest return of 6% would equate to almost $100,000.

So it can be said that even though 3 years apart, both parties had a similar idea as to what a reasonable super balance in retirement capped out at.

So what are those amounts worth today?

The $1,600,000 was indexed to $1,700,000 from 1^st July 2021.  Whilst that took 4 years, it has only taken another 2 years for inflation to jack it up to $1,900,000 which it will be from 1^st July 2023.  So what will it be by 1^st July 2025?  Very possibly at least $2,000,000 but more likely $2,100,000 the way inflation is running.

$3,000,000 may sound like a lot but the time value of money means it is worth a lot less than what most people think.

No wonder predictions are 500,000 mum and dad Australians will breach this cap come 2025/26.  And how many by 2030?  Roll forward to 2055 and it could be an alarming number (noting how house prices have inflated from 30 years ago).

So what does this mean to Fred who retires at the start of 2025/26 with $2,000,000 in super?

Fred (with a life expectancy of +/- 20 years) makes a downsizing contribution from the sale of his home of $300,000 (downsizing being a policy supported and widened successively by both parties).

Good investing could see his super earn 4% franked dividends and with growth of 5.25% – the return would be 11%.  In this case, Fred will start paying this extra tax from the 2029/30 year – it has only taken 5 years to fall into the system!  He started at only 2/3rds of the threshold but has breached it within 5 years.

And what if Fred is solely in accumulation for personal reasons?  Well he will fall into the system from the fourth year.

And what does this mean for the 2029/30 year?  In the first year the tax will only be $860.

But by 2038 the tax has grown to $27,221.  Seems a lot of tax to me particularly if the supporting assets haven’t been sold – and may even fall in value.  Roll forward another 5 and 10 years and the numbers start becoming eye watering (noting that one is taxed on the growth even if the assets aren’t sold or subsequently fall in value – think PayPal’s fall from its highest price to when it delisted).

And what about Jack who has $2,000,000 in super today?

Jack retires at age 65 in 2025/26 at which time he makes a downsizing contribution in addition to three years of making maximum super contributions (net of 15% tax).   Well Jack has the honour of being levied the excess tax from 2026/27.  Fred has started with $2,000,000, followed the rules, but is subject to this new excess tax from just its second year!

It is misleading to say this only affects 80,000 Australians.  As every year goes by, an increasing number of Australians will have their retirement savings eroded by this tax.

It will be interesting to see modelling of how many current 25 year olds will fall into the system by the time they reach age 65.