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New Div 296 Tax Legislation for Super Balances over $3m

Is your super balance over, or approaching, $3 million? In October 2023, the Australian Government introduced draft Div 296 legislation aimed at reducing tax concessions for individuals whose total superannuation balance (TSB) exceeds $3 million. The policy consideration of this measure is to achieve a more equitable Australian Superannuation System, and this new measure is estimated to affect only 0.5% of Australians with superannuation accounts. If enacted, from 1 July 2025, the proposed 15% additional tax will be imposed on superannuation earnings corresponding to the proportion of an individual’s superannuation balance above $3 million, resulting in an overall tax rate of 30%.

What is Div 296?

The new Division 296 tax is controversial because it imposes an additional 15% tax on the appreciation in the value of a member’s Total Superannuation Balance during an income year (with special adjustments), including unrealised gains. The Div 296 tax is generally based on the value of the investment instead of the actual taxable income of a superannuation fund. Furthermore, as unrealised gains are treated as earnings for the calculation of the Div 296 tax, the payment of Div 296 tax can cause cashflow issues for SMSFs that hold illiquid assets such as real property.

Technical Overview – How will Div 296 Tax be calculated?

The additional 15% tax will be calculated broadly by reference to the proportion of the person’s calculated earnings within the super fund that is attributable to their balance over the $3 million. The calculation includes all gains and losses, realized or not, with certain exclusions. Firstly, we need to compute the ‘superannuation earnings’ amount by the following formula:

• Earnings = (Current year TSB* + withdrawals – net contributions) – prior year TSB*
  • *TSB = Total Superannuation Balance

The taxable superannuation earnings is the difference between the current year TSB and the prior year TSB, adjusted for withdrawals and net contributions. The above formula removes the effect of non-earnings transactions by adding back withdrawals and pensions. The amount of contribution after tax is subtracted to ensure the earnings are not overstated by the contributions.

If the prior year TSB is below $3 million and the current year TSB is over $3 million, the calculation is also adjusted to ensure the growth of the TSB below $3 million is not counted in the Earnings calculation. Without this adjustment, the growth below the $3 million would have been included in the Earning calculation.

For example:

• Total Superannuation Balance at 30 June 2025 is $2.5 million
• Total Superannuation Balance at 30 June 2026 is $3.2 million
• Earnings = $3.2 million – $3 million (Deemed prior year TSB $3 million instead of actual prior year TSB of $2.5 million) = $200,000

If the closing balance of the TSB for the current income year drops to below $3 million, the closing TSB would also need to be adjusted to $3 million for the purpose of the Earnings calculation. This adjustment will crystallise the negative earning amount which can be carried forward and offset against the future growth of TSB once it exceeds the $3 million threshold.

Once the earnings have been calculated, the next step is to calculate the proportion of earnings that is attributed to the member’s TSB above $3 million.

• Proportion of Earnings = 100% x (Member’s TSB at the end of the income year less $3 million / Member’s TSB at the end of the income year).

After we have determined the Earnings amount and the proportion of earnings attributable to the member’s TSB in excess of $3 million, we can calculate the taxable superannuation earnings.

• Taxable superannuation earnings = Earnings amount x Proportion of Earnings

Div 296 tax is simply 15% of taxable superannuation earnings. The proposed Div 296 tax legislation also provides exclusions to Div 296 tax for members who passed away before the last day of the income year, child recipients of super income streams, members who are recipients of a structured settlement contribution, and members who have no ‘superannuation earnings’ under Div 296 tax.

Div 296 Tax Tips:

• Your share of any outstanding balance of a Limited Recourse Borrowing Arrangement is excluded in your TSB calculation.
• Negative superannuation earnings can be carried forward to reduce excess TSB in the future.
• Any withdrawals must satisfy the current conditions of release as there are no additional conditions of release introduced at this stage.
• Please note that the $3 million threshold is not indexed, as such it is essential to monitor the total superannuation balance to ensure it will not inadvertently exceed the $3 million.

Paying Div 296 Tax & General Interest Charge

Paying the Div 296 tax:

Individual members will be liable for Div 296 tax, rather than the superannuation fund itself. The method of paying and releasing authority rules for Div 296 tax are similar to Division 293: Payment deadlines are typically 84 days post-receipt of a notice of assessment from the Commissioner. However, specific amounts, particularly those tied to defined benefit interests, may be deferred.

To settle your Div 296 tax liability, you have the option to release funds from your superannuation interests or use external funds. If you hold multiple superannuation accounts, you can designate which one(s) to withdraw from. Requests for superannuation money release in response to a Div 296 tax assessment notice must be made within 60 days.

Division 296 general interest charge:

An additional interest charge, calculated by adding three percentage points to the daily base interest rate, applies to unpaid Div 296 liabilities. This charge is aligned with market rates to avoid penalising individuals who may lack immediate liquidity to settle their tax liabilities. Furthermore, a shortfall interest charge is applicable if a tax amount becomes payable due to an amended assessment.

Understanding and navigating these changes is crucial for individuals with substantial superannuation balances. Proper planning and consultation with a financial adviser, super specialist, and tax specialist can help in efficiently managing these new tax obligations.

How MP+ Can Help

To ensure that the Div 296 Tax will not cause unintended adverse consequences to you, it is essential to plan early and review the implications of your super contributions, purchase of investment property and other significant investment decisions in your superannuation funds.

The SMSF and tax teams at McKinley Plowman can help you navigate through the new landscape of Div 296 Tax. Our financial planners can also assist in formulating strategies that will achieve your financial and retirement objectives. Particularly if you have a high super balance, the impact of professional advice and support cannot be overstated – so don’t delay, get in touch with McKinley Plowman today on 08 9325 2411 (Perth), 08 9301 2200 (Joondalup), or via our website.

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