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Division 296: Criticism & SMSF Stressors Regarding the $3million Super Tax

With the Bill set to be introduced to the Lower House this week, it looks as though Division 296 legislation is set to be enacted by July 1 next year, despite concerns from Industry. The proposed “$3 million supertax” will impact less than 1% of Australians with a superannuation account in the 2025/26 financial year, but it remains controversial.

Indeed, since draft Division 295 legislation was introduced in October last year, critics describe it as rushed, flawed, and particularly punitive for SMSF members.

How is Division 296 Calculated?

Once the Division 296 tax is in effect, any earnings on superannuation balances exceeding $ 3 million in a financial year will be subject to an additional 15% tax, making the total tax on this portion of earnings 30%.

Each year, a member’s adjusted total superannuation balance (TSB) will be used to determine how much, if any, Division 296 tax should be applied. This ensures that only the change in value from the start to the end of the financial year is used in the Division 296 tax calculation.

Certain withdrawals are added, and the year’s superannuation contributions are subtracted to produce a TSB. Withdrawals are added to prevent taxpayers from taking money from their superannuation account to avoid a Division 296 tax liability. Meanwhile, contributions are considered an injection of capital rather than fund earnings, so they’re excluded from the Division 296 calculation. This area is complex due to the nature and number of withdrawals and contributions that may result in an adjusted TSB. Exclusions to withdraw and contributions are set to apply, so once legislation is enacted, it’s a good idea to become familiar with these conditions.

If the TSB at year-end is less than $3 million, the taxpayer will not be subject to Division 296 tax for that income year.

Division 296 Controversy

One of the most controversial parts of Division 296 is taxation on unrealised gains.

Rather than being based on the actual taxable income of a super fund, Division 296 sets the taxable amount based on the value of an investment. Critics suggest Division 296 be redesigned to exclude taxation of unrealised gains for various reasons.

For instance, superannuation funds often invest in a range of asset classes. And, since Division 296 proposes to tax “earnings” on these investments based on changes in the member’s TSB in that year, Division 296 tax is calculated on unrealised gains of the fund.

In principle, taxation of unrealised gains doesn’t align with the general approach to taxing profits in our taxation system and cash flow with the point of taxation.  

SMSF Members to Suffer under Division 296

Taxation of unrealised gains under Division 296 is of particular concern for SMSFs because they commonly hold illiquid assets like property.

Thus, members with balances close to the $ 3 million threshold or with investments in assets with the potential for steep increases in value may attract a liability under the proposed Division 296 tax.

Individual members are liable for Div 296 tax costs, not the fund itself – although members can release funds from their superannuation interests or use external funds.

Consequently, some SMSF members are forced to sell large, illiquid assets to fund a Division 296 liability because the member has insufficient funds outside superannuation to pay the tax. 

Experts suggest that SMSFs could report actual taxable income on a per-member basis, which would overcome this concern.

Further, SMSF industry experts are concerned that trustees who have assets with valuations that subsequently drop, spike, or change in value from year to year have no means to recoup losses.

In November, SMSF Association (SMSFA) chief executive Peter Burgess said taxing unrealised gains contained within the bill was “a tax on market movements and changes in asset values, not income, [setting] an alarming precedent as it represents a fundamental change in how tax policy is implemented in Australia”.

Critics, therefore, suggest Division 296 should be revised to include provisions for any adjustments or tax refunds in such a situation.

No Indexation of $3million Division 296 Cap

The SMSFA and others also hold further concerns regarding the indexation of the $3 million cap for Division 296 tax.

Unlike other superannuation caps, there’s no indexation of earnings over $3 million in the proposed Division 269 tax. This significantly increases the number of members set to reach a $3 million superannuation balance and the risk of potentially doing so inadvertently. 

For instance, a total super balance includes pensions, so if the cap remains unindexed, a transfer balance cap can breach the $3 million total. Meanwhile, couples with an SMSF can each have up to $3 million until one member dies.

With increases in investment, inflation, and no plans for indexation of the $3 million cap at any time in the future to consider, critics say Division 296 has the potential to impact many more superannuation members than the approximately 80,000 set to be impacted in 2025/26 financial year.

Therefore, once enacted, it is essential that members and their advisers monitor the total super balance to ensure they don’t inadvertently exceed the $3 million cap.

The Fight for Amendments to Division 296 Continues

Despite criticisms, the Government is seeking to finalise Division 296 with minimal change, so people have 12 months to prepare for the new tax on July 1, 2025.

And while industry experts are confident the Teals will attempt to introduce some amendments to the Bill, it’s unclear what those changes will be. Meanwhile, it appears the Greens will align with the Government.

“We can only now live in hope that [the Government] may index the cap. We have not heard anything from Treasury that there may be any changes to the Bill, and because they only called for supplementary submissions to be done by 2 May before a 10 May report it’s unlikely there would have been enough time to make any changes,” said SMSF Association CEO Peter Burgess last week.

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