Exposing the Myths Behind Australia’s $3 Million Super Tax Reform
Anxiety around super reform driven by misconceptions
The growing anxiety surrounding Labor’s proposal to reform superannuation tax for those with over $3 million in their accounts is largely based on myths. Financial expert Harry Chemay takes a close look at these misconceptions and lays them bare with sharp insight and clarity.
SMSFs and tax-efficient wealth sheltering
In recent years, the business media have highlighted how wealthy Australians increasingly use Self-Managed Superannuation Funds (SMSFs) to shelter vast amounts of money in concessionally taxed environments. This trend has only accelerated, and SMSFs have become powerful tools not just for saving but for long-term wealth creation.
Backlash against taxing large balances
What’s now surprising is the backlash against the Government’s plan to impose a tax on very large balances. This opposition is seen in daily headlines and commentary, even though some Australian Financial Review (AFR) contributors are starting to acknowledge the rationale behind the change.
The super system’s massive scale and structure
The superannuation system in Australia has grown to over $4 trillion by 2025, benefiting around 17 million Australians. The system is split between APRA-regulated funds (available to most people) and SMSFs, which are regulated by the ATO and allow up to six members per fund.
SMSFs’ original purpose and evolution
Originally, SMSFs were designed to support the self-employed, including farmers, medical professionals, and barristers, helping them manage retirement independently. Over time, however, they evolved into vehicles for highly tax-efficient wealth accumulation, attracting over one million users.
SMSF dominance despite small membership share
Today, SMSFs account for only 6% of all members but hold approximately 24% of total superannuation wealth, equaling over $1 trillion. The average near-retirement SMSF couple holds close to $2 million, about five times more than those in APRA-regulated funds. These funds, when converted into pensions, produce tax-free income starting at nearly $100,000 annually.
Tax-free income advantage grows over time
As these SMSF balances increase, so too does the tax-free income in retirement. Upon death, these balances can be transferred to dependents under generous tax concessions. It’s a strategy that moves high-income earners from a 45% marginal tax rate down to 0%—a massive advantage unavailable through other means.
Super tax concessions burden the taxpayer
But this lavish tax structure isn’t costless. Someone has to pay for it—and that’s the general taxpayer. According to Treasury, super contribution and earnings tax concessions are expected to cost $55 billion this financial year alone. In 2020–21, 83% of these concessions went to the top half of income earners, with 43% landing in the hands of the top 10%.
Sharp rise in mega-balances prompts reform urgency
The trend is stark. In 2005, fewer than 5,000 people had balances exceeding $3 million. By 2017, that grew to 30,000, and it now sits near 80,000. Treasury’s Intergenerational Report warns that without reform, the cost of super concessions will surpass the Age Pension by the 2040s.
Government proposes Division 296 super tax
To address this, the Government proposes a new tax—Division 296—which applies a 15% tax on positive earnings for super balances above $3 million per member. Those with more than $10m, $100m, or even $500m can still keep their money in SMSFs, but any growth above $3m will now be taxed.
Five biggest myths about the super tax reform
Let’s break down the five biggest myths surrounding this reform.
Myth #1: It’s an unprecedented tax on unrealised capital gains
Critics argue this tax targets unrealised capital gains, something long considered taboo in tax regulation. But this is simply not true. In practice, APRA-regulated funds already apply estimated earnings taxes—which include both realised and unrealised gains—using daily unit pricing models. This method has been industry standard for decades.
Unrealised gain taxation not unique to super
Also, consider this: homeowners already pay council rates based on land value increases—essentially a form of tax on unrealised gains. Similarly, land tax is based on capital improved value, making the comparison clear. This new tax isn’t without precedent—it aligns with existing practices.
Myth #2: It will hurt productivity by forcing early retirement
Another claim is that older, high-income individuals will choose early retirement to avoid the tax, leading to a drop in productivity. However, this flies in the face of demographic trends. Data shows that older Australians are increasingly remaining in the workforce, driven by both necessity and opportunity.
Workforce participation remains strong among the wealthy
Moreover, prestigious non-executive director positions remain highly coveted, and there’s little evidence that those holding wealth over $3 million will suddenly exit the workforce in protest. If productivity is the concern, structural issues beyond super taxes deserve more scrutiny.
Myth #3: It will discourage investment in startups
Critics argue that this tax will cripple early-stage investment, particularly in startups like Atlassian or Canva. But the data doesn’t support this. As of June 2023, only 6.7% of SMSFs had any exposure to unlisted Australian shares, which includes startup equity. These holdings make up just 1.4% of total SMSF assets.
Start-up investment minimal among SMSFs
While SMSFs may seek startup investments for high returns, the idea that this tax will starve innovation is grossly overstated. Let’s not forget the Peter Thiel-like scenarios where taxpayers bore the cost of untaxed billions in gains. Such outcomes should be avoided.
Myth #4: It will one day trap average workers
Fearmongers suggest that without indexing, the $3m threshold will one day ensnare everyday Australians. Treasury’s long-term projections say otherwise. By 2060, the median young Australian male is expected to accumulate about $500,000 in super (2019 dollars). Women would typically accrue 10% less.
Ordinary savers unlikely to breach $3m
The idea that ordinary workers will reach $3.6m assumes unrealistic investment returns and uninterrupted employment. As one who has built super calculators, Chemay notes that “if you torture the assumptions enough, they will confess to any balance you wish.”
Logical case for indexing the cap
That said, indexing the threshold would be logical. Historically, we had the Reasonable Benefit Limit (RBL)—which if kept, would now be around $2.5m. Applying wage-indexing to the $3m cap would raise it to around $13 million over 40 years, keeping it targeted at the wealthiest Australians.
Myth #5: People will abandon super and invest elsewhere
Some suggest that the wealthy will flee the super system entirely. But the truth is, super remains incredibly tax-advantaged. Even with the new tax, it still offers better outcomes than trusts or company structures for many.
Super incentives too strong to ignore
Back in 2006–07, the Coalition allowed people to contribute $1 million after-tax, which transformed super into a wealth creation tool for the elite. Many financial advisors, including Chemay, spent that year moving assets from property, trusts, and private companies into SMSFs.
Division 296 unlikely to reverse super’s appeal
If Division 296 is enacted, some wealth may return to those older structures, but not all. The incentives within super are too strong to abandon. As Chemay concludes, “superannuation was never meant to be an inexhaustible magic pudding for the ultra-wealthy.”
