Government releases $3m super tax reform draft legislation

06 October 2023

What You Need to Know

On 3 October 2023, the much-anticipated draft legislation for the Government’s Better Targeted Superannuation Concessions was unveiled. These changes are set to kick in on 1 July 2025.

Stay the Course

The draft legislation closely mirrors the initial proposals outlined in the consultation paper, with minor adjustments made in response to feedback.

Division 296 aims to level the playing field by reducing the concessional tax treatment of superannuation earnings for individuals whose total superannuation balance (TSB) exceeds the $3 million threshold.

The 15% Tax Twist

If your TSB crosses that $3 million mark, you may face an additional 15% tax on your superannuation earnings.

Starting from 30 June 2026, the new provisions will assess your TSB at the end of each financial year.

If it exceeds $3 million, further calculations will follow:

1. Determining the proportion of your superannuation above the $3 million threshold.
2. Identifying the superannuation earnings related to the portion exceeding the threshold.
3. Applying the 15% additional tax on those earnings.

The proportion of earnings subject to the additional tax hinges on comparing your current year TSB to your prior year superannuation balance, applicable only if your TSB exceeds $3 million.

Your superannuation earnings for the year will be based on changes in your opening and closing TSB, factoring in specific member withdrawals and contributions made throughout the period, as defined in the draft legislation.

The tax of 15% is then applied accordingly:

Addressing Concerns

At the original consultation paper stage released back in March 2023, numerous criticisms were voiced, including concerns about defined benefit funds, member deaths, limited recourse borrowing arrangements (LRBA), unallocated reserve accounts,  a lack of consideration for Division 296 or 293 taxes and non-indexation of the $3M threshold.

A primary concern was the inclusion of unrealised capital gains and losses on investments held within superannuation plus without regard to any CGT discounts when calculating the funds earnings. This poses particular challenges for self-managed superannuation funds with substantial unrealised capital gains and less liquid assets, such as properties.

The impact of this is that the net unrealised capital gains (the growth in value of the investment each year) would form part of the earnings to be taxed under the new Division to the individual (with no adjustment for the CGT discount) and upon the later sale of the investment, the fund would also be subject to tax on the net realised capital gain – potentially doubling the tax impact.

While Treasury has made some adjustments, such as exempting members from the tax in the year of their passing, introducing a TSB adjustment for LRBAs, and deferring the additional tax for defined benefit funds, disappointingly they have maintained their stance on taxing unrealised gains.

The Government announced that they believe the calculation to be the most fair and equitable method which could be used, based on currently available data from previously instated TSB laws.

The Silver Lining

• For Division 296 purposes, outstanding LRBAs won’t be included in your TSB, offering a more precise snapshot of your superannuation interests.
• In the year of death, you won’t be liable for Division 296 tax.
• For defined benefit interests, the tax liability is deferred until a member benefit becomes payable, with a settlement period of 21 days after the first member withdrawal.

Key Takeaways

• These rules do not impose a cap on the amount you can hold within superannuation.
• Negative superannuation earnings can be carried forward to offset future earnings, reducing tax implications.
• The ATO will assess and calculate Division 296 tax annually, with payment due 84 days after assessment.
• Individual taxpayers can use personal funds or release money from superannuation (excluding defined benefit funds) to settle the additional Division 296 tax.
• The Division 296 tax doesn’t apply to unrealised gains from the purchase date. Instead, it’s calculated based on TSB at year-end compared to the prior year, effectively allowing for a reset of investment values.
• The additional tax doesn’t double your tax rate; it applies only to earnings exceeding the $3 million threshold, with the effective rate varying based on your circumstances.

How it Works

The below example demonstrates the workings of the additional tax.

Take an individual with a TSB, with member balance components listed in the table below, who withdraws a pension of $80,000 and makes concessional contributions of $27,500 in the 2026 financial year.

Note, the only cash inflows for the fund in the 2026 financial year are the contributions made. The increase in the TSB is due to an increase in the value of existing investments in the fund.

Based on the profile this individual member would expect to receive a Division 296 assessment of $41,747.

An analysis of the worked example shows how the calculation incorporates the net unrealised capital gains of an individual’s TSB.

The Next Steps

The draft legislation’s consultation period runs until 18 October 2023, and significant lobbying efforts are expected, addressing the concerns mentioned earlier.

Furthermore, The Greens party, while not rejecting the draft legislation, has pledged to use their senate position to delay its progress until the Government considers introducing or enacting the proposal for superannuation on paid parental leave.

In the meantime, we will keep you informed as these superannuation changes continue to evolve.

If you would like further details or assistance with respect to any of the above changes, superannuation in general, or wish to have your position reviewed in light of the above, please contact our Superannuation Team.

Author:
Lindzee-Kate Tagliaferri, Manager

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This newsletter is current as of 06 October 2023, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

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