Post the federal election the topic everyone is talking about is the proposed additional 15% on superfund earnings on account balances above $3 million. This proposed legislation, named Division 296, has actually been tabled since 2023 but the recent election result means the tax seems increasingly likely to become law.
We are cautioning clients potentially effected not to act without seeking advice as taking money out of super now may be unnecessary, or may cause other income tax or capital gains tax consequences potentially worse than the $3 million division 296 tax.
The facts:
- Start date? The legislation is proposed to start on 1st July 2025, making the year’s closing balance at 30th June 2026 the first potential taxing point. This still allows a 12 month window to await the finalised legislation & form an appropriate strategy, hence the caution not to act just yet.
- What is taxed? For individuals with Member Balances greater than $3 million at 30th June the total earnings for the year on the super account are calculated, then apportioned between the first $3 million & the excess amount to determine the percentage of earnings that will be taxed at 15%.
- Who pays the tax? This is a tax on the individual, not the superfund. The ATO will issue assessments to the individual taxpayer, who then has the option of paying it themselves or asking their superfund to pay it out of their member account (similar to the current Division 293 tax). As this is not a tax imposed on the superfund, there is no tax credit available to the superfund, nor does it impact the superfund’s tax status regarding retirement phase accounts.
- What are the issues? The biggest issue causing discussion in the media and potential change as the bill passes through the senate, is how the Earnings amount is calculated and the resulting cashflow mismatch when paying the tax. Superfund assets are valued at market value, so the Earnings amount includes unrealised gains (or losses) on investments held. The proposed tax would be levied on a percentage of the unrealised gain but at that point there is no corresponding cash inflow available from which to pay the 15% tax, causing potential liquidity issues. There is also a perception of double taxation, as the individual is assessed on the unrealised gain now, and separately the superfund would still be assessed on any realised gain later when the asset is sold, subject to any tax free portion for superfunds with accounts in retirement phase. Note that when the asset is sold the realised gain wouldn’t again be reflected in that year’s Division 296 Earnings as it had already been included in prior years. However there is concern that if investment values fluctuate significantly between years it could result in a 15% tax on unrealised gains in one year, but no corresponding credit or claw-back of the 15% tax when losses occur in a future year.
- What’s next? Wait & see at this stage, but remain informed. The legislation may be altered from its current draft form to address key concerns. Once the legislation is finalised individuals or SMSF’s with account balances approaching or above $3 million will need to assess impacts, review fund liquidity, and form strategies both in the superfund & potentially with considerations to alternative investments structures and broader estate planning.
