The intricacies of Australia's superannuation system can be daunting. With upcoming changes on the horizon this year, global mobility will be impacted. In this blog post, we delve deeper into these upcoming changes.
IMPACT ON GLOBAL MOBILITY
- Increased employer contributions will impact company costs and assignment budgets.
- The higher surtax on earnings from 2025/2026 will impact a small minority of assignees with large Super fund balances. This may impact international assignees outbound from Australia.
- Prepare for Payday Super rules and ensure that systems are ready to remit Super contributions every pay period.
SUMMARY of Changes to Australia’s Superannuation Scheme (Super)
July 1, 2024: The mandatory employer contributions to Superannuation plans are increasing from 11% to 11.5% with a maximum annual required amount increasing to AUD 29,932.
July 1, 2025: The Superannuation mandatory contribution rate is scheduled to increase another half percentage point to 12%. This will be the final rate increase planned over a multi-year period that began in 2020. A higher taxation rate will be assessed on annual earnings within Superannuation plans for individuals with Super balances over AUD 3 million.
July 1, 2026: ‘Payday Super’ rules will come into force. This will require employers to fund the Superannuation contributions the same day that they pay the employee every pay period. This is intended to address problems with employers delaying when contributions are made, or not making the contributions at all.
BACKGROUND ON SUPERANNUATION
Australia’s Superannuation plan design is different than most pension schemes seen in other countries. It is a hybrid fund that has similarities to both social security and a private Defined Contribution plan (like a U.S. 401k plan). The Super provides for contributions and earnings to be in the account holder’s name. There are many choices for Super investment funds and plan design. The Superannuation funds are managed for the individuals’ benefit by private investment management companies that specialize in Super administration.
Employees normally cannot access their Super funds until they retire and attain a certain age, usually between 55 and 60 years depending on the employee’s birth year, or 65 years even if the employee continues to work. Distributions can either be in a lump sum or periodic payments. Early distributions are allowed on certain grounds for medical and financial hardship.
For internationally mobile employees, there are almost forty totalization agreements with Australia in force that can be used to either maintain contributions to Superannuation for outbound employees or avoid making Super contributions for inbound employees. For Super participants permanently leaving Australia, only certain individuals that are not (A) an Australian citizen, (B) a New Zealand citizen, or (C) an Australian permanent resident may take early distributions prior to retirement upon permanently leaving Australia. Departing Australian citizens and permanent Australian residents as well as New Zealand citizens must wait to access the Super funds under the normal retirement rules. New Zealand citizens have the option to transfer or roll over the Super balance to a similar New Zealand retirement scheme called Kiwisaver.
The employer must pay a percentage of the employee’s compensation into the Super, known as the Superannuation Guarantee Charge (SG). For the 2024/2025 tax year, beginning July 1, 2024, the employer’s SG contribution has increased a half percentage point to 11.5% of wages, up to an annual maximum of AUD 29,932. Employees may also make additional voluntary contributions – typically as part of a salary sacrifice arrangement on a pre-tax basis or as voluntary contributions made on a post-tax basis where the total contributions are more than the annual AUD 29,932 concessional maximum. ‘Salary sacrifice’ refers to the employee forgoing cash salary so that additional pre-tax Super contributions are made. Overall, the total allowable contributions made on a pre-tax and post-tax basis cannot exceed AUD 110,000 per year.
WHAT MAKES SUPERANNUATION DIFFERENT FROM OTHER PENSION SCHEMES
Typical pension design will provide for tax exemption during one or more of the three phases of a pension:
- At the time of contributions
- During the accumulation phase when the funds generate investment earnings (interest, dividends, and capital gains)
- At the time of distribution (typically at retirement, either as monthly income or a lump sum)
For example – a United States 401k plan. This is a Defined Contribution plan sponsored by the employer, with employee contributions made on a pre-tax basis up to an annual maximum. These amounts contributed are deductible to determining the employee’s taxable wages. Employer-matching 401k contributions are also not taxable at the time the contributions are made. Similarly, 401k fund investment earnings during the accumulation phase are tax-exempt. However, distributions taken from the plan are taxable. This is a plan that is “Exempt – Exempt -- Taxable” or ‘EET’ for the three phases.
Here is a second example – a United States Roth Individual Retirement Plan (Roth IRA). In this plan, contributions are on a post-tax basis, so no tax deduction is allowed for the employee at the time of contribution. However, the advantage of the Roth IRA plan is that both Roth IRA plan earnings during the accumulation phase and distributions are exempt from tax. A Roth IRA is “Taxable – Exempt – Exempt” or ‘TEE’ for the three phases.
In contrast, Australia’s Superannuation plan design has tax assessed at relatively low flat tax rates during the first two phases – A contribution tax is assessed in phase 1, plan investment earnings are taxable in phase 2, and generally distributions taken from the Super in phase 3 are tax-exempt or taxed at concessional rates. A Super is a “Taxable – Taxable – Exempt” or ‘TTE’ plan for the three phases. Australia’s system of taxing contributions and earnings (TTE) is uncommon across the other major economies. The more common system is where contributions and earnings are untaxed, and tax applies to distributions (EET). There are pros and cons to both systems. Certainly, the Australia Tax Office likes the TTE model. Simply by accelerating tax revenues collected years earlier in the first two phases, compared to the EET model when tax revenues are collected in the third phase. According to the Australia Budget Office, taxes collected from Superannuation account for about 5% of total tax revenue.
Let us take a look at how this TTE model works for a Super:
Phase 1 – Most contributions are taxed at a concessional rate of 15%. This contribution tax is withheld from superannuation contributions made by the employer, and this tax is remitted by the Super administrator. Certain individuals with higher incomes or who choose to contribute additional funds above the annual maximum will pay a higher tax rate.
Phase 2 – Plan earnings are taxed at a flat rate of 15%. Earnings are measured annually, comparing last year’s balance on June 30 with this year’s balance at year end. Adjustments are made for contributions and distributions made during the year. Earnings that accrue during the retirement period are exempt. The net adjusted taxable earnings are taxed at 15%. The Super administrator pays this tax out of the plan balance. But this concessional 15% tax rate on earnings will change with the 2025/2026 tax year for certain individuals. More on that in a bit.
Phase 3 – Distributions received by plan members, typically employees who have retired, are tax-exempt. To qualify, the individual would no longer be working and reached the qualifying age (55 years to 60 years, depending on birth year.) Workers still working after turning 65 years of age can also take tax-exempt distributions and continue to work. Individuals have flexibility in how to withdraw the funds. Distributions can be withdrawn either in a lump-sum or as an annuity in a series of regular payments. Certain individuals do not qualify for tax exemption and will pay tax on distributions, for example when an individual withdraws funds prior to retirement to meet medical expenses, or specific scenarios when a person dies and the funds are distributed to a nominated beneficiary, where the taxation result depends on the ages of the beneficiary and the deceased person.
THE TAX INCREASE ON SUPER FUND EARNINGS WITH HIGH BALANCES
The “Better Targeted Superannuation Concessions” rule will apply beginning with the 2025/2026 tax year. The intent is to bring a level of a progressive tax system to the Super Earnings (Phase 2). This means that certain high-net wealth individuals will pay an additional 15% surtax attributable to earnings on Super balances exceeding AUD 3 million. This brings the top marginal rate on earnings for large balances to 30%, up from the regular 15%.
The formula used in determining what earnings will attract the extra 15% surtax is a bit complicated since the individual’s multiple Super accounts need to be aggregated at year end, compared to prior year end balances, and adjustments made for contributions and distributions throughout the year. Total earnings are prorated for balances above 3 million. This extra 15% surtax will be an assessment by the ATO directly to the individual on an annual basis and is separate from the regular tax assessment process for individual income tax.
The individual can choose to pay the surtax directly, or direct that money to be released from their Super account to pay the surtax. In the event of negative earnings, the losses can be carried forward indefinitely to offset positive earnings in future years. Since the new rule goes into effect July 1, 2025, the first testing date for excess earnings will be June 30, 2026. Due to delays in reporting financial results, the first surtax assessments are expected in the second half of 2027. The ATO expects the extra tax to apply to less than 80,000 individuals.
PAYDAY SUPER
Effective for the tax year beginning July 1, 2026, the Australia Tax Office (ATO) will enforce new rules requiring employers to remit Superannuation contributions the same day they pay the employee, effectively remitting Super contributions every pay period. This is meant to accelerate when the funds reach the Superannuation plan. The ATO has noted that noncompliant employers have deferred when the contributions are remitted or not made contributions at all. The two-year delay in implementation will provide employers, payroll providers, and Superannuation funds sufficient time to prepare for the change.
Superannuation in Australia is complex. The article above is intended to summarize the general terms of the Superannuation provisions and does not cover nuances and all the tax regulations that may apply to a particular scenario. You are encouraged to consult with your Superannuation advisor for more details.
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