“The bills reduce the tax concessions by imposing a tax of 15 per cent on certain earnings based on the percentage of the TSB exceeding the $3 million threshold,” the government said in explanatory materials accompanying the draft legislation.

“The tax is imposed directly on the individual and is separate from the tax arrangements of the superannuation fund or scheme.”

The changes are set to take effect from the 2025–26 financial year and were originally unveiled by the Treasurer in February before being included in the federal budget in May.

In its submission to Treasury’s consultation on the draft legislation, the Financial Advice Association Australia (FAAA) said it is “disappointed” that many of the same issues from earlier consultations remain.

The first issue that the FAAA identified is the lack of indexation of the large superannuation balance threshold, while also noting that $3 million is too low.

As things stand, the $3 million threshold is a static figure that will not increase in line with inflation, which the FAAA pointed out does not align with the “long-term nature of superannuation”.

“Over time, a significantly larger percentage of Australians who responsibly prepare for retirement, in line with cost-of-living increases, will be inadvertently caught by an unindexed large superannuation balance threshold, which may be counter to the government’s intent and the objective of the super and retirement systems,” the FAAA submission said.

“We believe, consistent with previous advocacy from various stakeholders, that the threshold could be set at $5 million. This would reduce the number of impacted members (particularly if it is unindexed), whilst having minimal impact on the small number of very large accounts, that are presumably the primary target of this new tax.”

The FAAA also said the draft legislation ignores the diversity of users of the super system, particularly in terms of members with illiquid assets within their superannuation such as farmers and small business owners.

“For example, a farmer may hold their $5 million farm in a SMSF as the primary underlying asset to fund their retirement. This is permitted within superannuation law. Given the farm is also a farmer’s livelihood, it is not an asset that can be sold in order to minimise or pay a superannuation tax liability. It is an illiquid asset,” it said.

“Given the potential consequences of a large increase in the value of fund assets in any one year, any fund with a high proportion of illiquid assets would be at risk of needing to find money to pay the tax and would therefore be forced to hold a much higher level of funds in cash.”

Another related factor the FAAA called out is the taxing of unrealised gains, which it said “is without precedent and raises the question of fairness”.

“The proposed formula includes unrealised gains in the year's earnings. This results in many circumstances where assets held inside super may incur a higher effective tax rate than assets held outside of super, along with inconsistent treatment of the discounting for capital gains,” the FAAA said.

“The timing of the payment of tax is also an important consideration, in that a large tax may be payable in a year of very strong investment returns, whereas the following years could see market declines with no cash refund resulting.”

The association offered up the utilisation of some form of deemed return as a possible alternative.

“It is critical to ensure the settings of the Better Targeted Super Concessions are appropriate and in line with the intent of the measure, and work within the complex tax and superannuation system while minimising unreasonable unintended consequences for superannuation members,” the FAAA concluded.