The changes will now apply a two-tiered tax structure and only to realised gains, such as dividend or interest payments, and not to increases in the on-paper value of assets still being held, as originally proposed.
Earnings on super balances between $3 million and $10 million will now attract a 30% concessional tax rate, double the existing 15%, while earnings above $10 million will be taxed at 40%.
But in a major turnaround, both the $3 million and $10 million thresholds will now be indexed yearly in line with inflation.
The issue of indexing had been a major criticism of the original proposal, as it threatened to affect more Australians over time due to bracket creep.
Treasurer Jim Chalmers has confirmed he worked with the prime minister to overhaul his plan which he said the government was prepared to rework to get it through parliament.
Changes at lower end
As well as changes affecting higher super balances, there will also be an increase to the tax offset for low-income earners to $810, up from the current $500.
The so-called 'low income superannuation tax offset' is designed to ensure low-income earners don't pay more tax on their super contributions than they do on their regular incomes.
From 1 July 2027, it will apply to those earning up to $45,000 (up from the current limit of $37,000), making another 3.1 million Australians eligible to receive the offset.
Dr Chalmers said this would effectively deliver an extra $15,000 on average to lower income earners upon retirement.
Changes largely welcomed
The superannuation industry's peak body ASFA has welcomed the changes, saying they will make the system fairer and more sustainable in the long term.
"It's vital the super system is equitable and sustainable and the changes proposed by the Treasurer are important moves in achieving those goals," ASFA CEO Mary Delahunty said.
The country's largest accounting body CPA Australia also welcomed the government's "common-sense changes", particularly the decision to index tax thresholds.
"Bracket creep already has a silent eroding effect on personal finances," CPA's superannuation lead Richard Webb said.
"Policymakers have a duty to ensure that the spending power of future retirement savings is preserved."
CPA said it was also "relieved" to see the government change course on taxing unrealised capital gains - an element of the original plan it described as "particularly egregious".
"Taxing unrealised gains would have distorted our tax system, which needs broader reform."
Hole in the budget
The original super tax proposal was announced two years ago, sparking considerable pushback from different business and professional groups, and from critics across different political persuasions.
It was one of the Labor government's few revenue-raising initiatives and its watering down is expected to leave a hole in the budget.
However, Dr Chalmers said the new plan would raise only slightly less than the original proposal in the short term.
Over the four-year forward estimates period, the altered tax arrangements are expected to raise $4.2 billion less although that figure is expected to blow out over the medium term due to threshold indexing.
The new changes, agreed to by federal cabinet on Monday, are still to go through parliament.
If they're passed, the new tax package will take effect from 1 July 2026, one year later than originally scheduled.
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