The recently re-elected Federal Government plans to advance its Division 296 Tax Bill aimed at reducing the tax concessions available to individuals with superannuation balances exceeding $3 million. If enacted, the draft legislation will impose an additional 15% tax on a proportion of ‘earnings’ on superannuation balances over $3 million.
With a proposed start date of 1 July 2025, individuals who may be affected should now consider the nuances of this tax and how it interacts with their broader financial objectives.
A major source of concern is the proposal to include unrealised capital gains in the definition of ‘earnings’ for Division 296 purposes. Simply put, this means an individual’s superannuation could be taxed on the growth in the underlying asset values, even if those assets haven’t been sold and the cash realised. While this presents a new dynamic, particularly for assets prone to valuation swings, it’s important to assess the implications strategically.
As the Senate is scheduled to convene well after the proposed 1 July 2025 start date, this draft legislation leaves impacted superannuation fund members in a challenging position. Careful planning is paramount before making any hasty decisions – such as withdrawing funds or altering investment strategies – without fully understanding the potential consequences.
Key considerations for your superannuation
In the face of ongoing uncertainty surrounding how the draft legislation will take shape, it’s more important than ever to revisit the key considerations regarding your superannuation strategy – taking into account your personal circumstances, investment horizon and broader financial goals.
Asset allocation: Consider where to hold high-growth or potentially volatile assets. Is it optimal to house them within superannuation or could alternative structures be more effective? Any review must be holistic, weighing not just superannuation or tax, but also your broader financial circumstances.
Asset types: The nature of your assets and level of liquidity within superannuation requires careful planning. Holding illiquid or ‘lumpy’ assets, such as direct property, could pose challenges if this tax is introduced as drafted.
Review your overall structure: Take the opportunity to review and seek advice on your overall investment structures and to consider which investments are most tax-effective within different entities such as superannuation, companies or discretionary family trusts. These alternative structures may offer greater flexibility in managing tax outcomes and distributing wealth.
Age considerations: The impact of Division 296 can differ significantly based on your age and proximity to retirement:
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- Members who are nearing or are in retirement should consider various strategies such as managing drawdowns to potentially influence their Total Superannuation Balance, alongside careful review of their superannuation investment strategy.
- Younger members will need to closely monitor their superannuation balances if they already have (or anticipate having) substantial amounts accumulated. This requires careful modelling and consideration of long-term asset allocations.
Estate planning implications: It’s important to understand how any changes you make in response to any tax or legislative updates could impact your estate and succession plans. Regular review and monitoring are key to ensure your arrangements remain aligned with your estate planning objectives.
Asset protection: While you may maximise tax effectiveness using particular structures, it’s important to balance this with protecting assets (whether in superannuation, or alternative entities).
Valuation requirements: The evidence supporting superannuation asset valuations are likely to come under increased scrutiny should this tax be introduced, particularly for self-managed superannuation fund (SMSF) trustees. Consider the administrative implications and potential costs associated with obtaining suitable valuation evidence to meet these ongoing requirements, weighing them against the benefits of their investment choices.
How will the tax work?
Consider the following scenario:
Emily has a superannuation balance of $2.9 million at 30 June 2025, which has grown rapidly due to a focus on high-growth international technology shares. Her balance reaches $3.5 million as at 30 June 2026. However, due to the volatility of the market, her Total Superannuation Balance drops back to $2.8 million by 30 June 2027.
Under the currently proposed measures, Emily will be subject to Division 296 Tax in respect of the 2026 year. Assuming no contributions or withdrawals during the 2026 year, the calculation of the tax payable may be as follows:
| Percentage above $3M: | ($3.5M – $3M)/$3M x 100 = 14.29% |
| Earnings above $3.5M: | $3.5M – $3M = $500,000 |
| Taxable superannuation earnings: | 14.29% x $500,000 = $71,450 |
| Division 296 tax payable: | $71,450 x 15% = $10,717.50 |
For the 2027 year, assuming no contributions or withdrawals, there would be no Division 296 tax payable, nor refundable, given her balance went down. However, Emily will have ‘transferrable negative superannuation earnings’ which she can carry forward to reduce the Division 296 tax that would otherwise be payable in future years.
Some things for Emily to consider:
- How does she feel about paying the Division 296 tax on the unrealised gains in one financial year, only to see those gains reduce if the market corrects the next?
- Is there liquidity within superannuation to pay the Division 296 tax, or will she need to use personal funds elsewhere?
- If Emily is many years away from retirement, should she consider revisiting her superannuation investment strategy? What about the impact on her overall financial objectives?
While these case studies are simplified, they show that the key considerations will depend on your specific circumstances, objectives and risk tolerance.
Consider another scenario:
David and Sarah, both aged 60, run a successful family business. Their SMSF owns commercial property from which their business operates, valued at $7 million at 30 June 2026. The SMSF also holds some cash. Due to the property’s significant unrealised capital gain, a portion of this gain could be subject to Division 296 tax assuming each individual’s Total Superannuation Balance exceeds $3 million at 30 June 2026.
Things for David & Sarah to consider:
- Could they fund the Division 296 tax bill using their SMSF despite the ‘lumpy’ property asset?
- Should they instead fund the tax bill using personal funds? What if they don’t have the cash to do so?
- Are they prepared to obtain independent and supportable valuation data each year to value the property in the SMSF?
- Should they consider alternatives with the property? What if they sell it, what are the capital gains tax and other costs to consider?
When do they plan to retire? Should they consider restructuring their overall business affairs and how the property is held? And what about the impact on their overall estate plans?
Who needs to prioritise this review?
While anyone with a substantial superannuation balance should be aware of these proposed changes, certain individuals should engage in discussions with their adviser sooner rather than later:
- Those with a current Total Superannuation Balance approaching or exceeding $2.5 million;
- Individuals whose superannuation funds hold significant unrealised capital gains;
- Those with substantial illiquid assets (e.g. property) within their SMSF;
- Anyone concerned about the interaction of this tax with their estate planning or overall financial structuring.
The proposed Division 296 tax introduces new complexities into the superannuation landscape. With proactive advice and strategic planning, its impact can be effectively managed. The key is to avoid reactive decisions and instead develop a clear, holistic plan that considers your entire financial situation and long-term objectives.
To discuss how the proposed changes may impact you, contact your local William Buck advisor.
