The government’s super retreat fixes some design flaws, but creates a new distortion
- Written by Natalie Peng, Lecturer in Accounting, The University of Queensland
After months of vociferous pushback from the superannuation industry and wealthy investors, Treasurer Jim Chalmers has softened his proposed super tax reforms[1]. The move is a pragmatic political compromise – but it also raises questions about policy consistency and long-term fairness.
The revised plan has three key elements:
- a boost to the Low-Income Superannuation Tax Offset. The offset ensures[2] low-income workers don’t pay a higher tax rate on their super contribution than on wages
- a redesigned 30% tax on “future realised earnings” from superannuation balances between A$3 million and $10 million, with a higher 40% tax rate for balances above $10 million.
- the new $3 million and $10 million thresholds will be indexed to inflation.
What are the merits of the changes?
The low-income super tax offset boost is the clearest win. By increasing the offset from $500 to $810 and lifting the eligibility threshold from $37,000 to $45,000, the government is giving low-income earners – most of them women – a fairer tax break on their retirement savings.
This measure helps correct a long-standing imbalance: super tax concessions overwhelmingly favour[3] high-income Australians.
At the top end, introducing two new tax brackets makes the system more progressive, meaning those on higher incomes pay a higher tax rate. The new rates will be 30% on earnings between $3 million and $10 million, and 40% on earnings above $10 million.
At present the tax on superannuation earnings is 15%.
The decision to index these thresholds ensures wealthier super members aren’t hit by “bracket creep[4]” as asset values rise.
Crucially, shifting the tax base to realised earnings fixes one of the biggest design flaws[5] in the original proposal, which would have taxed unrealised capital gains that could later evaporate. That earlier plan faced fierce backlash from industry[6] and legal experts for its complexity and perceived unfairness.
Read more: Could Labor's super tax reforms be headed for a makeover? Here's how a redesign might work[7]
Low-income payments won’t rise with inflation
Broadly, this is good policy – but with caveats. Taxing only realised earnings is a more defensible approach. It avoids a situation where a super member could face a tax bill when the value of their investments rose. For large super funds, it makes the regime easier to administer.
However, it creates a new distortion.
When tax applies only upon the sale of an asset (such as business, farm or shares), wealthy investors may hold on to “winning” assets indefinitely to defer paying tax, a phenomenon known as the “lock-in effect”[8]. This can discourage portfolio rebalancing and reduce liquidity.
The biggest inconsistency, though, lies in indexation.
The government will index the $3 million and $10 million thresholds, protecting the top 0.5% of super balances held by about 80,000 people from inflation.
Yet the low-income offset – the key benefit for many thousands more low-income earners – will not be indexed.
That means its real value will steadily erode, while the benefits at the top end remain inflation-proof.
If fairness is the guiding principle, as Chalmers has said, then this asymmetry undermines it.
Plus, there’s a hit to the budget
The federal budget impact will be modest but symbolically important.
The government estimates the revised plan will cost $4.2 billion[10] over the four years of the forward estimates, mainly due to the one-year delay. However, in the first full year (2028-29), it is projected to save $1.6 billion, even after the low-income offset boost.
For perspective, super tax concessions are expected to cost nearly $60 billion in 2025-26. These tax breaks are on track to exceed the cost[11] of the age pension by the 2040s.
While these reforms won’t close that gap, they signal a modest but necessary re-calibration of super benefits.
How will future earnings be taxed?
This is the most consequential – and most uncertain – part of the announcement.
Under the revised plan, the new tax will apply only to “future realised earnings”. This approach is fairer and more workable than taxing unrealised gain each year.
But the government hasn’t yet spelled out how these realised gains will be allocated to individual fund members, especially in large self-managed super funds (SMSFs). That’s no small detail.
If the rules aren’t clear, members could simply hold onto assets and indefinitely postpone their tax bills. To stop this from becoming a loophole, Treasury will need to spell out what counts as a “realisation” — the moment a paper gain turns into a taxable one. That could mean when an asset is sold, transferred, or converted to cash, or at milestones such as retirement or withdrawal.
What about the balances over $10 million?
People with more than $10 million might move assets out of super – and that may be a good thing.
Those with more than $10 million in super already hold far more than is needed to fund a comfortable retirement[12]. Facing a 40% tax on future realised earnings, many may shift assets out of super into non-concessional investments taxed at standard income or capital gains rates.
That outcome would improve fairness in the broader tax system. Superannuation was designed to support retirement, not to serve as a low-tax inheritance vehicle. A modest exodus of ultra-wealthy funds would be a healthy correction.
A fairer outcome
The revised plan fixes key design flaws, preserves much of the intended revenue, and delivers a fairer outcome for low-income earners.
Yet it still leaves gaps – especially the failure to index the low-income super tax offset – that will quietly chip away at its fairness over time.
By choosing political pragmatism over policy purity, Chalmers has sidestepped another superannuation standoff.
References
- ^ proposed super tax reforms (ministers.treasury.gov.au)
- ^ offset ensures (www.ato.gov.au)
- ^ overwhelmingly favour (theconversation.com)
- ^ bracket creep (www.investopedia.com)
- ^ design flaws (theconversation.com)
- ^ industry (www.accountingtimes.com.au)
- ^ Could Labor's super tax reforms be headed for a makeover? Here's how a redesign might work (theconversation.com)
- ^ “lock-in effect” (www.investopedia.com)
- ^ Joel Carrett/AAP (photos.aap.com.au)
- ^ will cost $4.2 billion (ministers.treasury.gov.au)
- ^ exceed the cost (www.abc.net.au)
- ^ comfortable retirement (www.superannuation.asn.au)
