A proposed new Division 296 tax will levy additional taxes for earnings associated with large members balances and is currently expected to commence from 1 July 2025. The legislation will go before the Senate in February 2025, but if finalised ‘as is’, individuals will need to be ready to deal with the changes.
Who does the tax apply to and how does it work?
Individuals with a total superannuation balance (TSB) exceeding $3 million will be subject to the new arrangements from 1 July 2025 (income year ending 30 June 2026). An additional tax of 15%, known as the Division 296 tax, will be levied on certain earnings based on the percentage of the TSB exceeding the $3 million threshold.
Currently, all income earned within a superannuation fund – during accumulation phase – is taxed at 15% and the government proposes to tax larger member balances at a higher rate “to ensure generous superannuation tax breaks are better targeted”. This will bring the total tax rate of certain income within impacted superannuation funds to 30%.
Individuals with a TSB of less than $3 million will remain unaffected by these changes.
How is the tax calculated?
The additional 15% tax will be calculated based on member earnings associated with the adjusted balance exceeding $3 million, and earnings associate with the TSB less than $3 million will continue to be taxed at 15%. Broadly, the adjusted TSB is calculated as the member balance at the end of the income year plus any withdrawals that are less than contributions, as compared to the opening member balance.
Distinguishing this tax from nearly all others, is that unrealised earnings (being the increase in market value of assets) will be subject to the Division 296 tax.
An example of how the tax is meant to work is as follows:
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Jess has a TSB of $4 million on 30 June 2025, and $4.5 million on 30 June 2026. During the 2025–26 income year, Jess made concessional contributions of $27,500 and the superannuation fund paid 15% tax in relation to these contributions, i.e. $23,275 net of tax.
Her adjusted TSB is calculated as $4.5 million minus $23,375 that amounts to a total of $4,476,625. Following this, the earnings for the fund, for Division 296 purposes, is $4,476,625 (closing less opening).
Jess’s superannuation earnings for Division 296 tax in the 2025–26 income year is calculated as $476,625 and, because her TSB is above $3 million, certain earnings within the fund will be subject to Division 296 tax.
The percentage of Jess’s superannuation earnings above the $3 million threshold is
calculated as 33.33% (($4.5 million minus $3 million)/$4.5 million). This means $158,859 (33% of $476,625) will be subject to Division 296 tax and an additional 15% will be levied on this amount giving rise to a tax liability of $23,829.
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The tax liability for Division 296 will generally be due 84 days after the Commissioner gives the individual a notice of assessment for the tax, except for amounts determined to be attributable to a defined benefit interest and thus deferred to a Division 296 tax debt account.
Individuals can choose how to pay their Division 296 tax liability and will have the option of paying their tax liability either by releasing amounts from their superannuation funds or by paying the liability from outside of the superannuation system (e.g. cash) or a combination of the two.
Planning for the changes
One of the major concerns with the new changes is that unrealised gains will come within the scope of Division 296 tax that means superannuation funds will need to ensure liquidity to pay the additional taxes, unless the individual will pay the tax themselves. Superannuation funds with illiquid assets, such as property, will need to plan for this accordingly.
Another concern is situations where increases in member balances will give rise to an additional 15% tax in the year of increase, but, in relation to member balances decreasing in a particular year, the “loss” cannot be carried back to claim a refund for taxes previously paid and will instead only be carried forward and offset a future liability of Division 296 tax. This could have ramifications where property or shares increase or decrease in value as the member balance is calculated based on unrealised earnings and losses.
Additionally, the TSB threshold of $3 million is currently a fixed amount and not indexed, therefore we are concerned that the funds affected by the introduction of Division 296 will grow significantly over time.
Observations
It is important to note that although the start date for these changes commence 1 July 2025, Division 296 tax only applies in the event that the TSB exceeds the $3 million threshold at year end (i.e. 30 June 2026). Planning with your financial and tax advisors will be crucial in the lead up to these changes allowing for sufficient time to practically effect the implementation of any transfer, sales or reallocation of assets.
Additionally, we note that the imposition of Division 296 does not itself allow for members of affected superannuation funds to withdraw their superannuation balance. The strict rules around satisfying a condition
of release remains, therefore there will likely be a number of affected funds, where planning options are limited to the reallocation of the mix of assets only.
While we do not foresee Division 296 legislation sparking wholesale change in view regarding the attractiveness of superannuation, there is a distinct need to consider how the environment fits into overall succession and generational wealth transfer planning dependent on each member’s age and TSB.
Contact your Moore Australia advisor to obtain a tailored view on your specific circumstances.
Contact your Moore Australia advisor