The Government, after much push back from industry and the community has announced sweeping changes to their proposed Division 296 tax.
The start date for the new measure has been pushed back by twelve months to 1 July 2026, with the first measurement point now set for 30 June 2027.
Under the announced changes, Division 296 tax will no longer be levied on unearned income or unrealised capital gains, but on the realised or ‘earned’ income of the superannuation fund. Whilst the details on how this will be calculated are still to be disclosed, it’s expected that the realised earnings of each member will more closely resemble the taxable income of the superannuation fund.
The $3 million threshold will now be indexed in line with increases in CPI. Instead of adjusting annually, the threshold will only increase in $150,000 increments meaning it will only rise once cumulative CPI growth exceeds $150,000.
The additional tax applied will be 15 per cent on the income that is attributable or apportioned to the share of the member’s balance that exceeds $3 million.
The Government has also introduced a second superannuation balance threshold of $10 million. Members whose balance exceeds $10 million will have an additional tax levied at 10 per cent of the superannuation fund earnings that apply to the income that is attributable to balances above $10 million.
This $10 million threshold will also be indexed, which will increase in $500,000 increments.
With these changes the proposed legislation needs to be redrafted, and the superannuation industry is expecting the draft legislation to be introduced into Parliament in early 2026 following a period of industry consultation.
Example of how the proposed changes may work.
- Ben is the sole member of his self-managed superannuation fund (SMSF)
- Ben has a total superannuation balance at 30 June 2027, of $11,000,000
- The Fund has (taxable) earnings for the 2027 financial year of $500,000.
Under the new measures the fund will pay Income Tax of $75,000. ($500,000 x 15%)
Ben will further receive a Div 296 assessment for $59,091 which is calculated as:
- 15% of the earnings attributable to the balance from $3 million to $11 million. (72.72%)
- 10% of the earnings attributable to the balance above $10 million. (9.09%)
There are several facets of the calculation of realised earnings that are yet to be clarified. These include:
- Whether realised capital gains will be those gains that only accrue after the start date of the legislation on 1 July 2026, or whether they are the full realised capital gain from an assets’ acquisition date. This would be similar to what occurred when the Transfer Balance Cap was introduced.
- Whether realised capital gains will be subject to the normal capital gains discounting that applies where an asset is owned for more than 12 months, or whether it will be on a gross capital gains basis.
- Whether the ‘realised earnings’ can be reduced by exempt current pension income (if the superannuation fund is supporting the payment of pensions for members).
MKT Comment:
Whilst the new changes have been widely welcomed as a good step forward as it removes taxes on unrealised gains and will be subject to indexation, there are a couple of drawbacks to this.
- The details in regard to the calculation method and whether cost base relief will be available have not yet been announced. As such if no cost base relief is in the measures many fund members may actually be worse off with the proposed changes than the original Division 296 measures.
- The second-tier tax rate effectively means that for members with large superannuation balances they will effectively be paying a higher rate of tax for assets held within superannuation (40%) than the corporate tax rate. This issue is further compounded if members are too young to withdraw excess capital out of their funds to restructure.
If you would like to discuss how Division 296 might apply to your clients, please contact Chris Schoeman .