Super SA Triple S scheme members must carefully review the proposed Division 296 changes to superannuation taxation because of the fund’s distinctive tax structure. The new Division 296 tax is anticipated to apply to individual superannuation balances exceeding $3 million from 1 July 2025, with earnings (including unrealised gains) on the excess being subject to an additional 15% tax.
We have provided a comprehensive overview of Division 296 Tax: the proposed $3m super tax. This update will focus on the unique implications for Super SA schemes.
A key characteristic of the Super SA Triple S fund is its tax treatment. Unlike other superannuation funds, tax on the benefit is generally deferred and paid only upon withdrawal or rollover. If a person has less than $1.865 million in Super SA (this being the lifetime limit from 1 July 2025), they will generally pay 15% tax on that balance when they withdraw or roll to another fund, and 47% tax on the excess over $1.865 million.
By deferring when the tax is paid, Super SA Triple S balances will always be overstated, as the tax has yet to be deducted. Therefore, a person with $1,000,000 in Super SA Triple S may only really have $850,000 (15% less) when they access their super, and a member with $3,000,000 in Super SA Triple S may only have $2,186,000 (15% less on first $1.865 million and 47% less on next $1.135 million). While this can be a good thing as it allows people to have investment earnings on a larger account balance, it also makes an individual’s account balance appear larger in respect to other superannuation caps, including Division 296’s $3 million limit.
Division 296 and Super SA Triple S
Given Super SA Triple S overstates member balances by 15% (and potentially 47% on balances over $1.865m), members are more likely to be subject to Division 296 tax as their balances appear artificially higher.
For example, Susan has $1.5m (pre-tax) in Super SA and $1.6m in her SMSF, thus $3.1m total. She would be subject to Division 296 tax. If Susan rolled her $1.5m to her SMSF and paid the 15% exit tax (which is unavoidable), she would have $2,875,000 total and not be subject to Division 296 tax (unless her balance subsequently rose above $3 million).
Therefore, members of Super SA Triple S should consider whether they should roll their balances to other superannuation funds to lower their balance and potentially avoid or reduce Division 296 tax. This step should not be taken lightly. Professional advice should be sought to understand the positive and negative taxation consequences of such a change, as well as the investment options and performance of the alternative superannuation fund.
Furthermore, in the case that a Super SA Triple S member has more than $1.865 million, they could already be paying 47% tax on earnings. Therefore, if their total super balance across all funds is over $3 million and they pay Division 296 tax, they would theoretically be paying 62% tax on earnings.
Implications for Super SA Defined Benefit Scheme
Super SA has several Defined Benefit Schemes such as the Super SA Pension Scheme and Judges’ Scheme. If these are not granted an exemption, these Schemes could also potentially be faced with a higher Division 296 tax burden.
A defined benefit is normally an income for life, for example $100,000 per annum, and is normally indexed, thus potentially growing to $104,000 next year and so on.
From a Division 296 perspective, the $100,000 pa pension is likely to be capitalised using a formula by multiplying the pension by 16 and thus $100,000 per annum is the equivalent of $1.6 million of super.
The disadvantage is that when a pension rises from say $100,000 to $104,000 pa due to indexation, the $104,000 is now representing $1.664 million in super (16 x $104,000) of the $3 million super balance and thus potentially making the individual subject to more Division 296 tax if their combined super funds exceed $3 million.
Furthermore, as a defined benefit is generally a fixed income, the member has no ability to convert this to a lump sum to withdraw from super to help manage Division 296 tax.
Planning Considerations for Super SA Members
It is important to note again that Division 296 has not been legislated yet and the exact details could change. Therefore, members should be very careful before making changes to their superannuation strategy in the interim.
However, given the unique way the proposed $3m superannuation tax threshold may interact with Super SA funds, proactive understanding is prudent.
If you might be impacted by Division 296 generally and would like to understand the potential strategies available to you, please contact your William Buck advisor.
