Understanding the Proposed $3 Million Super Rule: What It Means and How to Plan Around It

The proposed $3 million super rule introduces an extra 15% tax on earnings from super balances above $3 million — including unrealised gains — prompting high-balance Australians to consider strategic planning to manage long-term tax exposure.

Written by Lance Swansbra

There’s been a fair bit of chat lately about the proposed changes to superannuation tax for high balances, what’s commonly referred to as the $3 million super rule. If you’ve got a decent chunk in super, or you’re on track to build a sizeable balance over time, this is one change you need to get your head around.

In this article, we’ll break down exactly what the rule is, how it works, who it affects, and importantly what you can do to manage or potentially reduce your exposure. We’ll also cover smart planning strategies like contributing to your kids’ super, investment bonds, evening up balances between spouses, and investing outside of super. Let’s dive in.

What is the $3 Million Super Rule?

The Federal Government has proposed a new tax that would apply to individuals with superannuation balances over $3 million. While it’s not law just yet (at the time of writing), it’s expected to kick off soon.

Here’s the short version:

• If your total super balance is above $3 million, you’ll cop an additional 15% tax on the earnings attributable to the portion above that threshold.

• This is on top of the usual 15% tax on earnings inside super (or 10% for long-term capital gains).

What’s really raising eyebrows is that the tax will apply to unrealised gains, that is, increases in asset values, even if you haven’t sold them. This is a big shift in how super has traditionally been taxed.

 How Will It Work?

Let’s walk through an example:

The example person has a super balance of $4 million at the beginning of the year and $4.5 million at the end of the year, a $500,000 increase.

Of that increase, $25,000 is a new contribution made by the person or their employer, which was taxed at 15 per cent. Subtracting that amount, the person has $475,000 in earnings. These earnings are already subject to the existing 15 per cent earnings tax.

But because the person has a super balance above $3 million, they will also pay the new additional 15 per cent tax. This does not apply to the full amount, it is scaled by the fraction of the person's super balance that is above the threshold.

In this case, one-third of the person's $4.5 million super balance is above $3 million. That means they pay the extra 15 per cent tax on one-third of $475,000, a tax of $23,750.

Who Will Be Affected?

According to Treasury, around 80,000 Australians would be impacted when this kicks off, a small number for now. But the real concern is that the $3 million cap won’t be indexed for inflation. So, as time goes on, more and more people will get caught, particularly those who are younger now but steadily building strong balances.

This isn’t just about today, it’s about where you’re likely to be in 10, 15, 20 years.

 Why It’s a Big Deal

Aside from who it affects, there are a few reasons this rule is causing concern:

• Taxing unrealised gains could create real cash flow problems, especially in SMSFs holding property or illiquid assets.

• No indexation on the $3 million cap means more Australians will be dragged into this over time.

• It changes the landscape for retirement planning, forcing high-balance members to rethink long-held strategies.

While it doesn’t stop you from having more than $3 million in super, it does change the tax equation significantly, so let’s talk about how you can plan around it.

Strategies to Reduce or Manage Your Exposure

If you’re nearing the $3 million mark, or planning to get there, you don’t have to sit on your hands. Here are some proactive strategies to help spread your wealth more efficiently.

1. Spouse Contribution Splitting to Even Up Balances

If you and your partner have uneven super balances, you might be able to use spouse contribution splitting to keep both accounts below the threshold and make better use of the available tax caps.

Here’s how it works:

• Each year, you can split up to 85% of your concessional contributions (usually employer and salary sacrifice contributions) with your spouse.

• It’s typically done in the following financial year, and your spouse needs to be under 65 and not yet retired.

By evening up your balances, you:

• Reduce the chance that one partner will hit the $3 million cap early

• Improve household-level flexibility with retirement income streams

• Make the most of both partners’ transfer balance caps (this is a rule that limits how much money you can hold in a tax-free superannuation pension)

Tip: Contribution splitting is especially effective when one partner is older or has already maxed out their pension cap, while the other still has room to grow.

2. Use Investment Bonds (Growth Bonds)

Investment bonds can be a solid tax-effective investment alternative outside super, particularly for high income earners with long-term goals.

They’re structured like this:

• You invest with after-tax money via a life company

• Earnings inside the bond are taxed at a maximum rate of 30% p.a., although some tax effective investment options can bring this down to around 20% p.a.

• If held for 10+ years, you can withdraw funds tax-free

These can work beautifully for funding future expenses (like kids’ education or helping with a house deposit) or just building up wealth outside of your super that won’t be counted towards the $3 million cap. We’re also seeing people over the age of 60 that will be impacted by the $3 million rule consider withdrawing money from superannuation and add it to a growth bond.

Bonus: They don’t require the same access conditions as super, so you retain flexibility. They are also great from an estate planning point of view.

Tip: You probably only want to consider an investment bond if your marginal tax rate exceeds 30%.

3. Invest in Your Own Name (Strategically)

One way to reduce the impact of the $3 million superannuation tax rule is to strategically use gearing outside of super.

Instead of continuing to pour funds into super where earnings above the $3 million cap could be taxed at an additional 15%, some investors may choose to borrow to invest in their personal names. This can be particularly effective when well ahead on the home mortgage or significant home equity is available.

This approach shifts future investment growth and income outside of super, where it’s not caught by the new tax. While gearing comes with risks, especially in a rising rate environment, it can be a smart play for those with strong cash flow and long-term investment horizons.

Done well, it not only diversifies where wealth is held, but can also create deductible interest expenses and tax-effective growth. As always, it’s something that needs good advice and careful structuring.

Tip: If you can retain the investments until after you retire, you may be able to reduce capital gains tax associated with investing personally.

4. Make Super Contributions for Your Children — Using Withdrawals From Your Own Fund

If you’re already retired or over the age of 65, and your super balance is over the $3 million threshold, you may want to consider withdrawing funds from your super and using those funds to make contributions into your adult children’s super accounts (where eligible).

Here’s why this can be a smart move:

• Withdrawals reduce your own balance, helping to limit the impact of the new tax

• Your children benefit from tax-effective growth inside super over decades

• It’s a way to pass on wealth strategically, without gifting large sums directly or triggering tax headaches

This is particularly useful for families with strong intergenerational wealth ambitions, where the focus is on long-term outcomes, not just short-term tax savings.

Let’s say you’ve got $4 million in super, you’ve retired and you’re over the age of 60. By withdrawing, $1 million and contributing it across your children’s super (subject to their contribution caps), you’ve now shaved down your own balance and given them a massive head start. If you use bring-forward rules, each adult child under age 75 could receive up to $360,000 in tax free contributions over three years, that’s powerful. The kids may even wish to make tax deductible super contributions which not only helps to build their retirement savings but also saves them some tax now. Keep in mind tax deductible super contributions are currently capped at $30k p.a., this cap includes any employer contributions.

Watch out for: Make sure you’re leaving yourself with enough money to live the lifestyle you want, it will be difficult to get back from the kids, particularly if it’s gone into their super.

This is one of the best tools available to gradually shift wealth down a generation while keeping as much of it as possible in tax-friendly environments. Just be sure to get advice before pulling the trigger, it’s easy to trip up the contribution rules if you’re not careful.

 5. Leverage SAPTO for Tax-Free Income in Retirement

If you’re over Age Pension age and don’t qualify for the pension, the Seniors and Pensioners Tax Offset (SAPTO) allows you to earn a decent chunk of income tax-free in your personal name.

Currently, you can potentially earn:

• Around $32,000 per person per year tax-free

• Around $57,000 for couples combined before paying any tax

This creates a great opportunity to draw down lump sums from super, invest outside the system, and generate tax-free income, especially if you’re worried about the future of super legislation.

For example, assume one member of a retired couple has $3.8m in super and is over the age of 60. The person withdraws $800k from super and invests it in joint names. Assuming taxable earnings of 5% p.a., that’s $40k of taxable income each year. If SAPTO is available all this income could be tax free.

This strategy is most effective if you’re no longer working and have a lower overall taxable income.

Wrapping Up

The proposed $3 million super tax rule represents a significant change to how retirement savings are taxed in Australia, especially for those with growing balances. While it’s still in draft form, the writing’s on the wall, and smart investors should start planning now.

The good news? There are plenty of strategies you can use to reduce your exposure and build wealth outside of super in a way that’s still tax-efficient and flexible. From contribution splitting and investment bonds to personal investing and super contributions for the kids, the key is knowing what’s right for you and acting early.

As always, a good financial advisor can help you weigh up the trade-offs, look at your overall picture, and structure your affairs in a way that’s tax-effective, future-proof, and aligned with your goals.

If you’re not sure how this might affect you, or want help thinking through your options, get in touch, we’re happy to have a chat

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The information in this article is general information and does not take into account any person’s individual situation. You should always do your own research, or seek professional advice to assist you in making an informed decision about what suits your needs.