New 2025 super changes: What they mean for you

Garreth Hanley:
This is With Interest, a business, finance, and accounting news podcast brought to you by CPA Australia.

Tahn Sharpe:
Hello and welcome to With Interest. I'm Tahn Sharpe, editor of INTHEBLACK. The previous 12 months has seen a raft of changes to superannuation, including an increase in the percentage of salary that needs to go into superannuation funds and a change to the way individual super balances of over $3 million are taxed.

There has certainly been a lot happening and just those two changes alone represent significant change to the retirement plans of so many Australians. Then we have amendments around payday super and parental leave to consider. Fortunately, we're joined today by CPA Australia's resident expert in this area, Richard Webb, who's our superannuation lead. So let's talk through some of the major changes to superannuation that have taken place recently. Richard, thanks for joining us on With Interest.

Richard Webb:
Thanks, Tahn. It's good to be here.

Tahn Sharpe:
Now Richard, the question on everyone's lips is the question around the proposed new division 296 tax, which is supposed to come into effect this year. Can you explain the new tax and where things are with it?

Richard Webb:
Right. Yes, Tahn and certainly the proposal follows through on the February 2023 announcement to impose an additional 15% tax on earnings from individual superannuation balances, which exceed $3 million. So this new tax is on top of the standard tax rates, which are 15% of course during the accumulation phase and 0% during the retirement or drawdown phase. The proposed mechanism involves calculating the change in a person's total super balance over the financial year with adjustments made for any contributions or withdrawals.

Earnings attributable to the portion of the balance above $3 million are then determined proportionally based on end of year holdings. Once the ATO receives the necessary data to make an assessment, they will issue a tax notice to the individual. The taxpayer can then choose to pay the amount personally, have their super fund pay it or use a combination of both methods. Although legislation to enact this measure was introduced previously, it lapsed prior to the election.

With the government now holding a larger majority, it is expected that the bill will be reintroduced quickly. While major changes are not anticipated, there is growing political and public pressure for the $3 million threshold to be indexed to inflation or wage growth and for alternatives to taxing unrealized capital gains to be considered.

Further clarification is still needed on how the new tax will apply to defined benefit superannuation accounts, which do not have individual account balances or earnings in the traditional sense. Draft regulations have proposed several valuation methods for these types of funds, but final details are pending. Importantly, the starting balance for this new tax calculation will be based on an individual's total superannuation balance as at 1 July 2025. So we need this clarification soon.

Tahn Sharpe:
All right, so perhaps a couple of design issues there to solve. Is there a reason why the method chosen by the government uses unrealised capital gains? It seems rather unusual that a method would be chosen that is so unlike how capital gains are taxed otherwise.

Richard Webb:
Yeah, that's correct, Tahn. And the government's decision to use unrealised capital gains is largely due to limitations in the current reporting systems of most APRA regulated super funds. These funds typically do not calculate or report detailed earnings such as franked and unfranked dividends, franking credits, capital gains and losses, et cetera, at the individual member level. Implementing such granular reporting across millions of accounts would require significant system upgrades and incur substantial costs.

But this is not impossible. For example, unit trusts can already manage this level of reporting for their investors, which suggests that the problem is not insurmountable. This is why many stakeholders, including CPA Australia, have advocated for alternative approaches. CPA Australia recommended that where funds such as SMSFs can provide accurate member level earnings data, they should be allowed to use that data instead of relying on the default method based on changes in total balance, avoiding paper gains, better reflecting actual income earned and aligning more closely with traditional tax principles.

Other organisations have echoed this sentiment proposing methods such as deeming rules or hybrid models that combine actual earnings with balanced based calculations. These alternatives aim to reduce the reliance on taxing unrealised gains, which can create liquidity issues and other risks for members and distort investment behaviour. Allowing flexibility in reporting methods could improve fairness and accuracy without delaying the implementation of the tax.

Tahn Sharpe:
Richard, you said a few moments ago that the calculation will need to take into account one's overall balance at the start of the tax year. That has already come and gone now and we don't have a method to do this yet. So how will this work if it hasn't actually been legislated yet?

Richard Webb:
Great question, Tahn, and it does highlight one of the key challenges with implementing the new superannuation tax. For most people with standard APRA regulated super accounts, the ATO already has a method for calculating total superannuation balances. This is done using data reported annually by super funds and includes components like accumulation and retirement phase values, rollovers and certain borrowing arrangements. So for these members, the ATO can reasonably establish an opening balance as at 1 July 2025 using existing systems.

However, this approach doesn't work well for defined benefit accounts. The current method, typically using a fixed multiple, like 16 times the annual pension, is too simplistic and it doesn't reflect a member's life stage or the actual value of their entitlements. Treasury has released draft regulations proposing some different valuation methods for defined benefit interests, but these can't be finalised or enacted until the legislation itself passes through Parliament.

What this means for members is that they may see more than one version of their total superannuation balance reported for the start of the 2025-26 financial year. One of those figures might be used for general superannuation purposes and another specifically for the division 296 tax. This could understandably cause confusion, so it's important that funds and advisers help members understand which figure applies to which purpose once the legislation and regulations are finalised.

Tahn Sharpe:
So moving away from division 296 for a moment and changing the focus, tell me about the change to the superannuation guarantee this year. We're now looking at 12%, correct?

Richard Webb:
Yeah, that's correct. The superannuation guarantee rate increased to 12% from 1 July 2025. This marks the final step in a series of scheduled increases that began several years ago. Employers will now be required to contribute 12% of an employee's ordinary time earnings into their super fund up from the previous rate of 11.5%. Importantly, this new rate applies to all OTE components of salary and wages paid on or after 1 July, even if the work was performed before that date.

For most employees, it means a slightly higher contribution going into their super each pay cycle, which can make a meaningful difference over time. Employers should ensure that their payroll systems are updated to reflect the new rate, and employees may want to check their payslips and super fund contributions to confirm the correct contributions are being made. Employees might also want to check to see if it affects their take-home pay or not. Their employer should be able to tell them the answer to this.

Tahn Sharpe:
Okay. And there's also been a lot of talk about super being paid on government funded parental leave from July 2025. Can you explain what's changing and why it matters?

Richard Webb:
Yes. So from 1 July 2025, the government will begin paying superannuation on parental leave pay for eligible parents. This new super contribution will be paid by the ATO at the normal superannuation guarantee rate of 12% based on the amount of parental leave pay received. It will be paid as a lump sum into the recipient’s super fund after the end of the financial year in which the leave was taken.

This changes a significant step towards improving retirement outcomes for parents, but especially women who often experience a superannuation gap due to time taken out of the workforce for having and then taking care of children. It means that even while on government-funded parental leave, their super continues to grow, helping to reduce long-term gender-based inequality in retirement savings.

Tahn Sharpe:
While we're on this subject, the other question is in relation to payday super. That starts next year, doesn't it?

Richard Webb:
That's correct. Payday super is set to begin from 1 July 2026. Under this reform, employers will be required to pay superannuation guarantee contributions at the same time they pay wages rather than quarterly as is currently the case. More specifically, super contributions must be received by the employee's super fund within seven calendar days of each payday, not seven business days. This change is designed to reduce unpaid or delayed super, improved retirement outcomes and make it easier for employees to track their entitlements in real time.

However, making this shift won't be simple. Employers will need to update payroll systems, coordinate with clearinghouses, and ensure their processes can meet the tighter deadlines. They may also need to ensure that they have access to more emergency cash since there may be a tighter stress on cash flows, especially during the first quarter of implementation. This may involve significant administrative and technological changes, especially for businesses that currently batch superannuation payments quarterly. While the reform is expected to benefit millions of workers, it will require careful planning and support to ensure a smooth transition for employers and payroll providers alike.

Tahn Sharpe:
That's really interesting and lots to look forward to. Speaking of looking forward, what about indexation Richard? Do you have the figures handy for say the coming financial year?

Richard Webb:
Oh, absolutely. And of course this is always a topic of great interest to our members. The main figures that I think our listeners will be interested in are the indexation of the general transfer balance cap, which goes up this year to $2 million. The general transfer balance cap is the amount which sets the maximum amount that anyone retiring for the first time is allowed to start their retirement income product balance with.

It also sets a tight limit on whether anyone is allowed to make further non-concessional contributions. So there might be some breathing room if you missed out on being able to make one last year. Contribution caps themselves are not going up this year. They were indexed last year and will stay the same this year at $30,000 for concessional contributions and $120,000 for non-concessional contributions. But remember, you may be able to bring forward some non-concessional contributions or use some past unused concessional contributions depending on your circumstances. Check with your financial advisor to see that this is something that you can or should do.

Tahn Sharpe:
Well, thank you, Richard. It's been great to go over this year's main talking points in super, and I think the information you've given will be super helpful to great sections of our audience.

Richard Webb:
Thank you, Tahn. It's been my pleasure.

Tahn Sharpe:
That brings us to a close for today. Thanks very much to our guest, Richard Webb, and see the show notes for a link to additional information if you'd like to know more. From all of us here at CPA Australia, thank you for listening.

Garreth Hanley:
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