The $3m super tax is coming! If you’re invested in equities, here is how it might impact you

It seems during the next 3 years, the $3m super tax will be officially a thing. Itwas blocked by the Senate and shelved by the government, until after the next election. Treasurer Jim Chalmers explicitly labelled it ‘unfinished business’.

Now that Labor has been re-elected, and it needs only obtain the support of the Greens in the Senate to pass it, one can only conclude that it’ll be question of when and not if.

There’s been a lot of talk about the tax generally, but little in relation to equity investors, particularly those focused on the ASX. So we thought we’d fill the gap as to what it might mean.

What is the $3m super tax?

Anyone who has more than $3m in superannuation is liable for an extra 15% tax on earnings for balances above the threshold. Crucially, the tax applies not just when you cash out but just by having this balance. You could not touch your super at all, yet still be taxed.

What’s more is that this threshold is not indexed to inflation. And this is on top of assessable income from the super fund which is already subject to a 15% tax. And if the value that asset falls – losses won’t be refunded, there’ll just be an offset against future (actual) earnings.

The only people who could find a way around the $3m super tax will be certain public servants (judges, retired politicians and others) that can have the liability deferred into retirement. Wilson Asset Management boss Geoff Wilson quoted economic Dimitri Burshtein in calling it ‘an interest-free loan from the government for public servants’.

This legislation has passed the House of Representatives and attempts made to index the threshold failed. But the senate stalled it, the government intends to try again if it wins the election.

By 2027-28, the government anticipates it will raise $2.3bn. And with no indexation, the $3m super tax will make more money than it otherwise would. By 2040, that $3m will be only worth $1.9m in today’s money. And so many Gen Zers starting out in their careers will eventually be paying it, unless indexation occurs.

So what does the $3m super tax mean for stock investors?

This is the question we want to answer. For those above 65 – and certain other individuals close to that age under the ‘Transition to Retirement Income Stream (TRIS) – they are entitled to withdraw from superannuation (without tax if over 60) and may choose to do so in order to avoid the $3m super tax. Investing in stocks is one way they may choose to spend this money, but there are plenty of other investment choices or even other ways to spend the money.

In the alternative, investors wanting to avoid the super tax may choose to adjust their portfolio to reduce the likelihood of tax liability, or potentially sell investments that have no potential of generating more returns (especially if they have made capital losses on them).

In our view, the most attractive investments in a world with the $3m super tax will be liquid, income-rich and non-volatile – so blue chip stocks most likely. Many of these are already held by superfunds, to the extent that CBA told investors over 10m Australians would benefit from the dividend – despite the fact that less than 1m are personally shareholders, the balance of that number hold shares through their super fund. Although income rich investments will result in a liability, at least it is only payable if the income is actually received.

If you are satisfied with your equity portfolio, and are eligible, you may opt for the TRIS scheme enabling a tax-free income stream, and you could use this to invest in ASX stocks personally, rather than through your SMSF. And then you’ll only be liable for tax if you receive dividends or make a capital gain.

Conclusion

With the $3m super tax potentially beginning soon after next years’ federal election, people with super funds need to consider what it means for them. This is particularly the case if they invest in stocks – they may need to adjust their portfolio to ensure that the tax won’t be a hit to their wallet.

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