The proposed Division 296 legislation is part of the federal government’s policy to reform the taxation of large superannuation accounts. It is scheduled to take effect on 1 July 2025, pending approval from the Labor-Greens-controlled Senate. The results of the election means that the introduction of this measure almost seems inevitable.
The Division 296 legislation is designed to impose an additional tax on individuals with superannuation balances exceeding $3 million. Here’s how it will work:
- The tax will be calculated based on the proportionate earnings related to the amount of an individual’s total superannuation balance (TSB) that exceeds $3 million on 30 June 2026. The first assessments will be issued in the 2026–27 income year.
- The calculation involves determining the ‘superannuation earnings percentage’ of the TSB above $3 million, which is then applied to the net movement in the adjusted TSB to arrive at the tax base, referred to as ‘taxable superannuation earnings’.
The steps to calculate the tax include:
- Calculate the percentage of your total superannuation balance above $3 million at the end of the financial year.
- Multiply this by the earnings in your super, which are calculated differently from other existing taxes.
- Multiply this by 15% (the Division 296 tax rate). The ATO will calculate this tax automatically and issue a tax bill to individuals to pay.
For example, if your total superannuation balance is $4 million, the amount above $3 million is $1 million. If the earnings on your superannuation balance are $100,000, the taxable earnings would be calculated as follows:
- Percentage of balance above $3 million: $1 million / $4 million = 25%
- Earnings on superannuation balance: $100,000
- Taxable earnings: 25% of $100,000 = $25,000
- Division 296 tax: 15% of $25,000 = $3,750
The member of the superannuation fund would receive the notice to pay this amount and could elect to pay it personally or release funds from superannuation to pay it.
The difficulty with this tax is that the calculation does not look at real earnings rather it simply focusses on the movement in an individual’s superannuation account and deems this movement as earnings, thus creating a tax on unrealised growth within a member’s superannuation balance. It would therefore be correct to class this as a tax on the member rather than a tax on superannuation itself especially as the liability is created in the name of the member.
This measure has received much criticism from various industry bodies due to the nature of the way the tax is levied however, with the government winning a second term with a larger majority the passage of the law in its current form seems a lot more certain. So as advisors how can we assist our clients in planning for this without simply resorting to withdrawing funds out of superannuation prior to the start date of the legislation. In many cases, depending on the client’s situation, withdrawing funds from superannuation may not be the best course of action and work should be done with the member’s licensed financial adviser to ensure that a holistic solution is applied.
There are strategies all fund members, and their advisers should consider from 1 July 2025 when the measure is slated to commence.
- Recognise all liabilities of the Superannuation Fund
The measure will apply from 1 July 2025 and so will take the member’s superannuation balance at 30 June 2025 and track this against their balance at 30 June 2026 (adjusted for contributions and withdrawals). Many SMSFs only recognise the tax payable at 30 June each year on the balance sheet, noting that the net assets representing the members balance at the end of the year. Many fund trustees don’t account for deferred tax on investments.
Deferred tax is recognised by calculating the temporary differences between the carrying amount and the tax base of assets and liabilities. For superannuation funds, this often involves investments that have appreciated in value but have not yet been sold. The deferred tax liability is recorded in the financial statements and represents the future tax payable when the asset is eventually sold.
Recognising this liability in the 2026 financial year will therefore reduce the fund’s net assets and therefore reduce or even eliminate a member’s 2026 exposure to the Division 296 tax.
For example, a member has a balance of $5 million at 30 June 2025. If the fund trustee determined that from 1 July 2025 they would now recognise deferred tax, and the fund value at 30 June 2026 was $5.5 million of which $4.4 million was unrealised growth in fund investments, then the fund would recognise a deferred tax liability of $440k in 2026. The fund’s net asset value would now be $5.06 million rather than $5.5 million. The earnings for the fund would now be $60k instead of $500k thus substantially reducing the impost of the measure in the first year.
- Look at investment mix
This measure will effectively tax the unrealised growth within a superannuation environment where this would not occur outside the superannuation environment. The superannuation fund itself would still continue to receive concessional tax treatment on real cash earnings, and the member would be taxed on notional and cash earnings. The total of the two taxes combined need to be factored into determining where assets are to be held and whether assets should be removed from the superannuation environment. In many cases the overall tax payable utilising a superannuation fund is still substantially lower than utilising another structure.
If, for example, we look at the first calculated example above to calculate the tax we can see that the member will pay $3,750 for the $100k in “earnings” for the period. If these earnings were all notional (ie unrealised growth) then this is $3,750 more in tax than would have been paid in any other structure. If however the earnings were in fact net cash from a term deposit then the $3,750 plus the $15k income tax the fund pays (15% of $100k) would total $18,750, or 18.75% of the income. This is still less than the 30% rate that could be utilised in the next most tax effective structure being a corporate rate, and would be less that the rate for an individual already earning significant other income.
It is therefore critical that a holistic analysis is done by the member, yourself as their trusted tax advisor and their financial adviser considering their whole portfolio to determine whether a change in investment mix such that yield generating assets are held within the fund v growth related assets now held outside the fund.
The introduction of this measure therefore means that fund members need to be more vigilant and holistic in how they plan their affairs and as tax advisers we need to ensure that we work closely with other advisers, specifically financial advisers, to deliver strategies that best suit clients given the way this new measure singles out growth in superannuation assets.
If you want any further information or assistance in planning for the effects of Division 296 please call Chris Schoeman.