As debate rages over the Labor government’s tax changes for large superannuation accounts, some young workers have asked their financial advisers whether they will be caught by the reforms.
Advisers have told Guardian Australia that some young workers have even questioned whether they should stop making additional contributions.
Experts say it’s unlikely that younger Australians will get caught by the changes, with older, high-income earners the most exposed to the reforms.
Here’s what young Australians need to know about the changes.
What is the superannuation tax change?
Most workers are legally entitled to be paid a guaranteed 11.5% of their wages into their superannuation fund, or 12% from July this year.
The government levies a tax of 15% on the earnings on super balances of workers yet to retire and of retirees with more than $2m.
Labor has proposed to lift that 15% tax to 30%, but only for the earnings from the portion of the balances over $3m. Earnings on the first $3m in an account would still be taxed at 15%.
The tax would be levied each year. You can read a broader breakdown here.
Will I get $3m in my super?
Economists expect most young people working now will not hit $3m balances, though higher-income earners will have a higher chance at getting there.
By the 2050s, when millennials will be looking at retirement and gen Z and Alpha will dominate the workforce, one in 10 people will have $3m balances, Treasury and Grattan Institute modelling shows.
That could rise to three or four in every 10 people in the 2060s, according to Diana Mousina, an AMP economist. But she says it is unlikely that “half of gen Z” will reach $3m in super balances, contrary to some media reporting of her analysis.
Mousina’s modelling shows a worker earning more than $90,000 a year who works for 40 years consecutively with a 3% pay rise every year would probably achieve a $3m balance. This means a worker in their 20s who reaches $90,000 or over soon, then maintains it for the rest of their working life, could one day be affected.
Workers on lower incomes who made no extra contributions and took time off work, for example to have a child, would be unlikely to reach $3m, according to Harry Chemay, a superannuation and wealth management consultant.
The Financial Services Council, meanwhile, expects about 500,000 people of 14.6 million now employed would earn enough to see their top-range tax breaks reduced slightly under the proposal.
Will the tax threshold be raised from $3m?
Experts believe it is likely the threshold for the new tax would be lifted above $3m at some point in the future, so some young people who hit the $3m figure may not end up paying extra.
Mousina is among those who agree the $3m benchmark for the new extra rate will probably rise but she suggests the increase could be baked into the new laws for the tax, which need the Greens’ support to pass.
“We should think about indexing it, rather than just having no legislation around when it’s going to cap out,” she says.
Should I stop putting money into super?
While the reform would increase tax rates on big balances, superannuation would still be an effective way for high-income earners to reduce the tax they pay.
The average superannuation balance in mid-2022 was $164,000, so most Australians are nowhere near balances over $3m.
The proposed 30% tax rate is still lower than the top income tax rate of 45%, meaning superannuation contributions would continue to offer a tax break for well-paid workers.
Public debate over the tax illuminated how lightly superannuation is taxed, according to Jonathan Philpot, a wealth management partner at accounting firm HLB Mann Judd in Sydney.
“It actually highlights that super actually has much lower tax rates than virtually any other structure you can have in your retirement years,” he says. “I wouldn’t want people changing their super plans.”
What’s the fuss all about?
The lack of assurance on whether the tax threshold will be lifted above $3m has attracted some media outcry, despite expert consensus that the figure would have to rise.
Debate has also focused on the proposal to tax a type of investment return called unrealised gains, which would see high earners pay tax on a rise in value of some assets on paper while leaving them unable to get that money back if the asset value falls in the future.
Most super accounts would have limited exposure to unrealised gains, according to Chemay. Australians with self-managed super funds are more likely to struggle with this type of investment.
Self-managed super funds only make up about 1 million of the 20 million or so super savers – and just 15% of them are under the age of 45.
For perspective, 4 million Australians have more than one super account. The government in 2018 estimated the resulting extra fees would leave the average worker about $50,000 worse off by the time they retired.
