The Federal Government intends to reduce the concessions available to individuals with superannuation balances that exceed $3 million with its proposed Division 296 Tax. If enacted, the draft legislation will result in what is an additional 15% tax on the earnings of superannuation balances above $3 million.
While the proposed changes have been in the headlines for some time, the practical applications were unknown until earlier this month when Treasury released an Exposure Draft of the legislation, referred to as Division 296 Tax. A contentious feature of the draft legislation is the inclusion of notional (unrealised) gains in the calculation of superannuation balances, alongside actual gains. This could result in some taxpayers attracting a liability for profits or gains they never benefit from.
Here we provide an overview of the key aspects of this much-discussed legislation, its potential impact on different taxpayers and the practical considerations that all Australian taxpayers (not just high earners) need to be aware of.
What is Division 296 Tax: the proposed additional 15% tax for high super balances?
The proposed legislation, Division 296 Tax, has been drafted in response to concerns about tax concessions benefiting individuals with superannuation balances above $3 million.
Under the proposal, if an individual’s total superannuation balance exceeds $3 million at the end of the financial year, they may be subject to an additional tax of 15%. This additional 15% tax will be applied to the proportion of earnings relating to an individual’s superannuation balance exceeding $3 million, on top of any regular earnings tax imposed on their superannuation balance. Balances below $3 million will continue to be taxed at the existing concessional rates.
While the core principles of the proposed legislation remain consistent with existing laws, the complexity of the definitions and formulas involved makes understanding and interpreting the measures challenging.
Three core concepts form the foundation of the Division 296 Tax:
- Adjusted Total Superannuation Balance (Adjusted TSB): This amount will determine if you sit above or below the $3 million threshold and whether you are liable for the Division 296 Tax. A taxpayer’s Adjusted TSB includes all their Australian superannuation balances, excluding foreign superannuation funds.Importantly, when assessing a taxpayer’s Adjusted TSB, the Australian Taxation Office (ATO) will consider the market value of assets regardless of whether this value has been realised. This could have a significant impact on individuals holding property or speculative assets within their superannuation fund.Moreover, determining your Adjusted TSB is not as simple as referring to the value on your member statement. Rather, the legislation has introduced a new method for calculating the value of an individual’s Adjusted TSB for the purposes of Division 296 Tax. It’s important to seek expert advice in calculating your Adjusted TSB.
- Superannuation earnings: These are the deemed earnings that your superannuation fund made for the financial year. These earnings consider your Adjusted TSB together with total withdrawals and total contributions for the year. Those earnings apportioned based on the amount of your superannuation balance above $3 million will attract the additional 15% tax.
- Transferrable negative superannuation earnings: Where an individual has negative earnings for the year and their balance is greater than $3 million, the negative earnings may be carried over to a future financial year to reduce any future Division 296 Tax liability.
How will Division 296 be administered?
If the legislation receives Royal Asset, it will take effect from 1 July 2025.
The ATO will issue a Division 296 Tax notice of assessment to the individual, with payment due within 84 days. Taxpayers can choose to pay this liability personally or request payment from their superannuation fund within 60 days of assessment. Failure to pay on time will attract a general interest charge.
What are the practical implications of Division 296?
Investing in superannuation may (for the majority of taxpayers) remain an attractive investment strategy given its comparably favourable tax treatment. However, taxpayers should take the time to understand how the proposed law may impact their personal circumstances. Given the legislation is still in draft form, and the measures are not proposed to apply until 1 July 2025, there is still time to review your existing superannuation strategy. Considerations include:
- Asset allocation: Consider where high-growth assets should be held, either inside or outside of superannuation. Any review should consider not only superannuation legislation but other tax issues (such as capital gains tax) and take into account broader financial affairs.
- Asset types: Determine whether holding ‘lumpy assets’ like property in superannuation will pose challenges. Could you be taxed on a gain that may never be realised? (e.g., assets that may go up in value within the financial year but drop in value by the time they are actually sold).
- Consider your overall structure: Now is the time to seek advice on which investments are most tax-effective in various structures, such as superannuation, companies, or discretionary trusts.
- Estate planning: Ensure you understand the potential impact of Division 296 Tax on your estate and succession planning, including any unintended outcomes for beneficiaries in the event of your death.
- Age considerations: Taxpayers on the younger side may need to keep a close eye on their superannuation balance. If you hold high-value assets in your superannuation fund, but are 10, 20 or 30 years from accessing those funds for retirement, you may be paying tax on a value that may not be realised.
- Asset protection: Within any new legislative measures, it’s important to strike a balance between protecting assets and maximising tax effectiveness of your structures. Depending on your circumstances, superannuation may provide asset protection advantages compared to holding assets in certain other structures.
- Valuation requirements: Consider whether more frequent and detailed asset valuations are required and how the potential administrative burden of ongoing valuations stacks up against the benefits.
The proposed Division 296 Tax is a significant development in Australia’s superannuation landscape, with far-reaching implications for taxpayers. With the range of issues at play, it’s important to seek advice from a multidisciplinary team including superannuation experts, accountants, wealth advisors and tax specialists to make informed decisions about your financial future.
To discuss how the proposed changes may impact you, contact your local William Buck advisor.