Superannuation and retirement : Mercer's Australian Federal Budget 2023-24 analysis and insights 

As expected, there were no major new superannuation measures announced in the Budget. The Budget did confirm, but provided limited additional details on:

• The additional earnings tax on super balances over $3 million announced in February and to be applied for the first time on 30 June 2026; and
• The Payday Super initiative announced last week, which would require employers to pay their employees' Superannuation Guarantee (SG) contributions at the same time as their salary and wages from 1 July 2026.

There was also some welcome news on proposed amendments to the problematic non-arm’s length income (NALI) tax provisions relating to fund expenditure.

Other measures include an unexpected review of Defined Benefit notional contributions methodology.

Read on for further details and analysis. 

In February the Government announced that from 1 July 2025, individuals with a total superannuation balance over $3 million at the end of a financial year will be subject to an additional tax. Once implemented, this tax will be effected through an additional 15% tax on the earnings related to the portion of their balance over $3m (not indexed).  In short, earnings attributable to balances above $3m will generally attract a combined headline tax rate of 30% from 2025/26, 15% lower than the highest marginal tax bracket.

Noting that funds do not currently report (or generally calculate) taxable earnings at an individual member level, the proposed approach uses an alternative method for identifying taxable earnings on balances over $3 million. Based on a Treasury Fact Sheet released after the announcement in February:

• The additional tax will apply to the earnings attributed to the proportion of an individual’s Total Superannuation Balance (TSB) over $3m at the end of the financial year (Excess Earnings).
• Total Earnings for this purpose will be calculated based on the change in TSB over the year, less net contributions, plus withdrawals.
• Excess Earnings will be calculated as Total Earnings multiplied by the proportion of the total balance over $3m at the end of the financial year e.g. $1m/$4m = 25% for a TSB of $4m.
• The additional tax will be 15% multiplied by Excess Earnings.
• Negative Excess Earnings (i.e. a loss) for a financial year can be carried forward to reduce the tax liability in future years.
• The calculation of Total Earnings includes all notional (unrealised) gains and losses.
• The ATO will calculate Taxable Earnings and the Excess Earnings tax each year and send assessments to individuals, who can elect to pay the tax directly or from their super fund/s.
• The new tax will be separate to an individual’s personal income tax, similar to the existing Division 293 tax on concessional contributions for high income earners.
• TSBs in excess of $3m will be tested for the first time on 30 June 2026, with the first notices of a tax liability expected to be issued to individuals in the 2026-27 financial year.

Treasury subsequently released a consultation paper relating to implementation of the measure, including issues such as the earnings calculation, fund reporting required and the appropriate treatment for defined benefit interests. Responses to this consultation closed 17 April 2023.

The Budget Papers provide very limited further information on the new tax, such as that, in 2027/28, the first full year of receipts collection, revenue from the new tax is estimated to be $2.3 billion. 

Mercer considers that it is reasonable on sustainability and equity grounds to reduce the tax concessions on very large super balances. We are therefore supportive of the proposed measure, provided it is implemented in a manner which minimises additional fund administration costs which are likely to be borne by all members if incurred.

It would have been preferable if the revenue expected to be raised by this measure was directed towards removing other equity issues within the system, such as, the payment of the Superannuation Guarantee on paid parental leave to make it a more meaningful change.  Instead, this will be seen as another one-off tax change undermining the confidence individuals will have in committing savings into the superannuation system. 

Despite this general support, we would like to see the measure include in-built indexation arrangements. This would aim to avoid a fall in the real value of the $3 million threshold over time and to maintain a reasonable margin over the pension transfer balance cap, which is indexed to CPI.

Unfortunately, as usual the devil is in the detail, much of which is yet to be worked out. This is particularly so in relation to members with Defined Benefit (DB) arrangements.

For DB arrangements, it will again be a case of trying to fit a square peg into a round hole. This is as there is no ‘correct’ way to apply the tax to DB to achieve an equivalent basis to accumulation accounts and anomalies will arise with DB whatever method is adopted. For most funds, there will be very few, if any, DB members affected, at least in the private sector. 

Mercer therefore advocates that the approaches adopted for DB are focused on keeping it simple and minimising additional reporting. Further, we consider it to be critical that approaches which require special actuarial valuations to be prepared each year for individual DB members be avoided as this will result in additional costs which will likely be passed on to members.

The bulk of the administration of the new tax is to be undertaken by the ATO, however it appears likely that funds will have to report some new information to allow the ATO to calculate the tax. It is yet to be determined precisely what that new information will be, and whether it will be required to be reported for all members, or only for members potentially affected by the tax (as identified by the ATO). Funds will have to await further details before the reporting implications can be assessed.

Depending on the final arrangements, funds with DB members may need to consider whether to allow the tax to be paid from a DB Tax Offset Account, which would be recouped from the DB when it is paid.

Unfortunately, even though few members will be affected, member information on tax and super will need to be updated in due course to include reference to the (proposed) new tax, further complicating what is already a far too complex tax regime.

While some senior employees may be affected and there may be some additional administration costs for DB employer sponsors, the tax is not expected to have an impact on employers unless some employees seek additional compensation for the increased tax.

Most members will be unaffected by the new tax. Budget estimates suggest that this measure will impact around 80,000 individuals in 2025–26, or approximately 0.5 per cent of individuals with a superannuation account, though this may increase into the future.

For members with high superannuation balances, this tax introduces another threshold at which superannuation tax concessions are withdrawn as balances increase. Other existing thresholds include:

• $500,000, at which catch-up concessional contributions are no longer available.
• $1,480,000 ($1,680,000 from 1 July 2023) where access to the bring-forward of non-concessional contributions decreases.
• $1,700,000 ($1,900,000 from 1 July 2023) beyond which non-concessional contributions are no longer permitted, and the limit on amounts that can be transferred into tax-free pensions is reached.

This new limit of $3,000,000 forms an additional threshold, resulting in the increased tax on earnings.

Members with high balance accounts may consider whether there is any action they can take to reduce the potential impact of the new tax. This might include contribution-splitting and making withdrawals, where permitted, for re-contribution into a lower-balance spouse account. Individuals will need to seek advice as to their own personal circumstances.

From 1 July 2026, employers will be required to pay their employees' Superannuation Guarantee (SG) contributions at the same time as their salary and wages. Development of this measure will be supported by a consultation period led by Treasury and the ATO with industry and other interested stakeholders in the second half of the 2023 calendar year, with the final design to be considered as part of the 2024–25 Budget.

Mercer welcomes this measure, having advocated for many years for super to be paid at the same time as salary and wages.

Beyond the direct benefits to members which flow from earlier investment of contributions, Payday Super is expected to substantially reduce unpaid (or underpaid) SG contributions, which the ATO estimated totalled $3.4 billion in 2019-20. Under Payday Super, unpaid super will be able to be identified much earlier, both by employees and the ATO.

In effecting the change, the Government has indicated that the 1 July 2026 start date was aimed at providing employers, superannuation funds, payroll providers and other parts of the superannuation system with sufficient time to prepare. Mercer’s opinion is that a three-year lead time is unnecessary and would prefer to see an earlier start date to bring forward the benefits of the change.

Based on the Budget Papers, the measure will only apply to SG contributions, whereas Mercer believes it should also apply to salary sacrifice contributions.

Details yet to be revealed include whether there are any implications for Defined Benefit (DB) arrangements.

Trustees will need to plan for a significant increase in the volume of contribution transactions e.g. for an employer with a weekly pay-cycle, the number of contributions for each employee each year will increase from 4 (if paying quarterly) or 12 (if paying monthly) to 52.

There should also be a positive impact on transaction volume flows for fund administrators to manage, such as a ‘smoothing out’ of the current quarterly SG contribution peaks across the year.

Mercer expects that this changed cycle will also lead to changes in the pattern of contribution flows. Within this we expect that there will be more frequent, smaller peaks and trustees will need to factor this into their cash-flow modelling.

There is also the potential for the greater frequency of SG contributions to lead to increased complexity of Fund business rules, with a subsequent impact on operational processes including increased complexity and increased risk of error where manual contribution (exception) processing occurs.

Noting the three-year lead-time, employers will, in due course, need to consider and plan for the implications of Payday Super for administrative and payroll processes, as well as cash flow. These implications will vary considerably between employers, with many (particularly medium and larger) employers already paying super contributions on pay-cycle or at least monthly.

The SG penalty system will be one of the areas for consultation as the details of this measure are worked out. In Mercer’s view it is important that the system provides clear guidance to employers and enables the correction of any genuine payment errors without attracting disproportionate penalties. For example, this could include provision of a grace period.

In the meantime, the ATO will receive additional resourcing to help it detect unpaid super payments earlier and the Government will set enhanced targets for the ATO for the recovery of payments.

Mercer considers Payday Super to be a positive for individuals. It will make it easier for employees to keep track of their payments, and harder for them to be exploited by disreputable employers. It will also considerably enhance the ATO’s ability to detect non-payment of SG contributions, by making it much easier to check super liabilities reported to the ATO by employers against contributions reported to the ATO by super funds.

The change will particularly benefit those in lower paid, casual and insecure work. This includes many women - who are more likely than men to have unpaid or underpaid super.

Receiving contributions earlier also means they will be invested for a longer period. According to the Government, with Payday Super a 25-year-old median income earner currently receiving their super quarterly and wages fortnightly could be around $6,000 or 1.5 per cent better off at retirement. 

The Government has undertaken to legislate to amend the NALI income tax provisions which apply to the treatment of expenditure incurred by superannuation funds so that funds will not be exposed to penal income tax treatment arising from non-arm’s length classified expenditure.

Legislative relief was previously proposed in broad terms by the Morrison Government to replace a temporary ‘practical compliance approach’ provided by the ATO to industry. The current Government consulted on a legislative relief option earlier this year.

According to the Budget papers, the Government will amend the NALI provisions which apply to expenditure incurred by superannuation funds by:

• Exempting large APRA regulated funds from the NALI provisions entirely for general and specific expenses of the fund (an improvement from the consultation proposal which only exempted general expenses);
• For SMSFs and small APRA regulated funds:
  • limiting any income that may be taxable as NALI (at the highest marginal rate) to twice the level of a general expense (also an improvement from the consultation proposal for a cap of five times the expense);
  • excluding contributions from fund income taxable as NALI i.e. contributions will be subject to normal income tax treatment; and
• Exempting any expenditure that occurred prior to a fund’s 2018/2019 year

The Government’s commitment to provide permanent relief to the NALI risk in terms of the ATO’s previously announced treatment and implications of any non-arm’s length expenditure incurred by super funds is welcomed.  It has been unsatisfactory for fund trustees to have had to rely on temporary administrative relief measures of the ATO for the risk involved to date. 

However, the legislative drafting must still be undertaken carefully to ensure that the relief is delivered and meets the announced intent in full. Time is short for the legislative amendments to be finalised ahead of the expiry of the current ATO transitional compliance approach on 30 June 2023. 

The announced amendments should avoid the need for large funds to implement cumbersome compliance processes to be able to demonstrate to the ATO that every item of fund expenditure has been incurred on an arm’s-length basis.

Trustees should continue to monitor the position and risk management of NALI regarding any non-arm’s length expenditures with their tax advisers pending progress with the legislative relief and once the new rules become clear.

Nil

The amendments as announced would remove the risk that all of fund’s income for a year could be taxed at 45% as a result of a single item of non-arm’s length expenditure of any amount.

In addition, the changes should avoid members having to bear the increases in costs that would arise from the significant additional compliance expenses funds would have to incur to satisfy the ATO’s proposed compliance.

Budget Paper No 2’s commentary on the over $3m super balance tax includes a statement that the estimated $950 million of revenue from this new tax over the 5 years from 2022-23 ‘includes $50.0 million in receipts associated with updating the notional contribution calculation methodology, applicable to all defined benefit members’.

Notional contributions are currently used for DB members for concessional contributions cap purposes and Division 293 tax.  It appears the Government is planning a review of the methodology which will result in higher notional contributions and tax revenue than presently apply.

This would not be good news for some DB members. We await further details with interest.

Budget Paper No 2’s commentary on the over $3m super balance tax includes this statement: ‘This measure is consistent with the Government’s proposed objective of superannuation, to deliver income for a dignified retirement in an equitable and sustainable way.’

This differs from the definition of the objective of superannuation proposed in the Government’s consultation paper earlier this year, which was to ‘to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”.

Is the objective referred to in the Budget paper just a short-hand version, or does it indicate where the Government has landed following the consultation?

The Government will provide $14.2 million over 4 years from 2023–24 to support its sustainable finance agenda, including:

• $8.3 million over 4 years from 2023–24 (and $1.3 million per year ongoing) to establish a sovereign green bond program to raise capital for environmental and climate change related programs
• $4.3 million in 2023–24 for the Australian Securities and Investments Commission (ASIC) to ensure the integrity of sustainable finance markets by investigating and undertaking enforcement action against market participants engaging in greenwashing and other sustainable finance misconduct
• $1.6 million in 2023–24 to support the initial development of a sustainable finance taxonomy for classifying economic activities according to their impact on sustainability goals.

Funding for ASIC activities will be cost recovered from industry via ASIC levies.

The Government has announced $45.2m over 4 years (with $8.4 m per year on-going) additional resourcing for the Office of the Australian Information Commissioner to:

• progress actions and enforcement for serious privacy breaches
• enhance data and analytics capability
• support a separate stand-alone Privacy Commissioner

In addition, it has committed $0.9m in funding to the Attorney General’s Department to progress the Government response to the review of the Privacy Act.

A further $5m over 5 years has been set aside to continue to fund a super consumer advocate charged with improving member outcomes from their activities. It appears that Super Consumers Australia will continue in this role.

The extra funding is to be recouped from the super industry via an increase to the APRA Superannuation Supervisory levy.

The start date for the tax integrity measure relating to franked distributions funded by capital raisings has been announced to change from 19 December 2016 to 15 September 2022.

The measure would prevent the distribution of franking credits where a distribution to shareholders is funded by particular capital raising activities.

It was originally announced as part of the 2016‑17 Mid‑Year Economic and Fiscal Outlook and the current Government consulted on draft legislation for the measure in September last year.

The Budget did not announce a further extension of the temporary 50% reduction in the minimum annual payment amounts for superannuation pensions and annuities.

As a result, the 50% reduction in the minimum pension drawdowns, which has applied since the 2019-20 income year, will cease on 30 June 2023.

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