10 October 2024
What You Need to Know
The House of Representatives have today passed the Bill (Better Targeted Superannuation Concessions and Other Measures) that will introduce the Division 296 provisions.
Since the concept of Division 296 was developed, industry bodies have been lobbying for significant changes to the proposed legislation, with some of the requested amendments being:
- that the $3 million total superannuation balance threshold be indexed
- an alternative way to calculate earnings may be more appropriate so as to remove the taxation of unrealised gains / losses.
Despite the lobbying, the House of Representatives passed the Bill on 9 October 2024 with no amendments. It has been some delay in this outcome, and it remains uncertain whether the Bill in its current form will ultimately become law. As an example, given no amendments were made to the original Bill, the industry bodies have been advocating for the Senate to reject the Bill, which could gain traction.
It is noted however that for the Government to put the Bill forward on the 9th and have it passed through the House, they would be expecting to have the relevant support in the Senate for the Bill to pass through Parliament.
The next steps in the process through Parliament are as follows:
- The Bill is now sitting with the Senate for the second time, where the Senate must pass the Bill in its current state, being the exact Bill that has moved through the House of Representatives.
- Where the Senate requires amendments to the Bill, the Senate must request that the House of Representatives amend the Bill.
- Where the House of Representatives disagrees with the amendments requested by the Senate, the Senate must then decide whether or not to agree with the original Bill (with no amendments).
- Where no agreement between the Senate and the House can be reached, the Bill then needs to be reintroduced in a different form (back to the drawing board).
Therefore, there could still be further wrangling and changes before there is the full passage of this legislation.
What is Division 296?
The proposed Division 296 of the Income Tax Assessment Act 1997, to take effect on 1 July 2025 will impose a new tax on individuals who have a total superannuation balance of more than $3 million.
An individual’s total superannuation balance (TSB) is a summation of all the superannuation interests an individual has, including:
- all accumulation accounts
- all retirement phase accounts
- an outstanding limited recourse borrowing arrangements (where entered into after 1 July 2018) – although for Division 296 purposes, these will not be included.
- less any structured settlement / personal injury contributions.
Your total superannuation balance is the entirety of your super in all funds in Australia, and not on a per fund basis.
The Division 296 tax will be calculated based on the proportion of earnings pertaining to the amount of your total superannuation balance in excess of the $3 million threshold. A common misconception is that Division 296 imposes an absolute 15% tax on the amount exceeding $3 million. Instead, the tax is applied to the proportion of the relevant earnings above the threshold, allowing for a more balanced approach.
Division 296 Tax is calculated through a three-step process
1. Determine Division 296 Earnings by:
2. Determine the Proportion of Earnings over $3 million (to which the tax will be applied):
3. Application of the tax rate:
Where a negative earnings amount is calculated for the year, no tax is calculated, and the loss is carried forward to the following financial year to be offset against that year’s earnings.
How it Actually Works
The below example demonstrates the workings of the Division 296 tax.
An individual with total superannuation balances as listed in the table below, who withdraws a pension of $100,000 and makes concessional contributions of $30,000 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 value of the account is due to an increase in the value of existing investments in the fund.
Based on the above, this individual would expect to receive a Division 296 assessment of $43,088.
Key Takeaways
- These rules do not impose a cap on the amount you can accumulate within superannuation.
- These rules do not change the way that superannuation funds themselves are taxed, with 15% tax on earnings in accumulation phase (10% on long-term realised capital gains) and 0% tax on earnings in retirement pension phase.
- Negative Division 296 earnings can be carried forward to offset future earnings, reducing future 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 to pay the liability, or release money from superannuation (excluding defined benefit funds) to settle the additional Division 296 tax.
- Division 296 tax doesn’t apply to unrealised capital gains from the purchase date of the asset within a fund. Instead, it’s calculated on a year by year basis on any increase (or decrease) in value. Therefore, no reset of any cost base within superannuation will be required.
- Individuals who wish to use superannuation sources to pay the tax will need to review the liquidity of their superannuation where the tax will apply to ensure sufficient cashflows to meet the additional requirements. In this regard, the first assessments won’t be expected to be issued until November 2026, depending on the lodgement of superannuation funds’ 2025/2026 annual returns.
- The additional tax doesn’t double your tax rate (as has been implied); it applies only to calculate earnings on assets exceeding the $3 million threshold, with the effective rate varying based on your circumstances.
- Where an individual has a defined benefit accumulation account, the payment of the calculated tax with respect to that account can be deferred, to be paid when the individual moves to retirement phase (with interest accruing).
Concerns with the introduction of Division 296
The most contentious issue through the introduction of Division 296 is that unrealised capital gains are captured, and the potential liquidity issues a tax liability creates for superannuation members holding illiquid assets. Unlike the operation of the capital gains tax provisions where this tax is only payable upon the sale of an asset and realisation of a gain, Division 296 introduces taxation on the annual increase in value of superannuation assets, regardless of whether the gains have been realised. Investors may be forced to sell such assets prematurely to meet their tax obligations. This disrupts the intended purpose of superannuation to provide retirement by way of the long-term growth of their retirement savings.
Next Steps
Notwithstanding this tax, most calculations that we have undertaken on the impact of these provisions has still resulted in superannuation remaining as the most tax effective investment vehicle in Australia. However, as each individual will be impacted differently based on their personal circumstances, there will not be a one size fits all solution.
As previously outlined, the industry bodies have not given up hope and are urging the Senate to strongly consider the major issues of indexation and taxation of unrealised gains and reject the Bill. As the Government do not have a majority position within the Senate, they will be relying on the Greens and Crossbenches to move the Bill over the line.
We will be monitoring the passage of this Bill in the Senate and will keep you informed.
In the meantime, where this legislation is likely to affect you, and you would like further clarification please reach out to our superannuation team who can assist you.
This newsletter is current as of 10 October 2024, 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.
Cooper Partners Financial Services Pty Ltd AFSL 000 327 033
The information and opinions in this presentation were prepared by Cooper Partners Financial Services (“CPFS”) for general information purposes only. Case studies and examples are included for illustrative purposes only.
In preparing this newsletter CPFS has not taken into account the investment objectives, financial situation and particular needs of any particular investor. The information contained herein does not constitute advice nor the promotion of any particular course of action or strategy and you should not rely on any material in this presentation to make (or refrain from making) any decision or take (or refrain from making) any action. The financial instruments, services or strategies discussed in this publication may not be suitable for all investors and investors must make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives.This information is general advice only and neither purports, nor is intended to be advice on any particular matter.
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