Over the last few months, much has been spoken of the Government’s proposed Division 296 tax on superannuation. Whilst the pronouncements have yet to become law, for those that may be impacted, it is important to understand what it will mean for you and what decisions you will need to consider.
What do we know?
Division 296 is intended to first apply from 30 June 2026 to individuals with superannuation balances greater than $3 million. If your superannuation balance is less than $3 million, you will not be affected by Division 296.
A tax rate of 15% will apply to the earnings attributable to an individual’s superannuation balance which is in excess of $3 million.
As a formula, Division 296 tax will be calculated as:
Division 296 tax = 15% x Earnings x Superannuation Balance > $3 million
Total Superannuation Balance
The calculation of earnings for Division 296 purposes is based on the annual change to your Total Superannuation Balance measured at 30 June, adjusted for contributions and withdrawals made during the year. Effectively this equates to the income and growth of your superannuation investments over the financial year.
A key criticism of Division 296 is the application of tax to unrealized capital gains. Ordinarily capital gains tax is only applied to realized capital gains when superannuation investments are sold.
Another key criticism of Division 296 is whilst tax is levied on investment growth, there is no tax refund on investment losses. Instead, these investment losses can be carried forward to offset investment growth for future Division 296 tax assessments.
Whilst Division 296 tax is based on earnings inside superannuation, the tax liability will be the responsibility of the individual. There will be the option to choose to pay the tax either from personal funds or elect to have the amount released from your superannuation. It is worth noting that such tax payments made from your superannuation will reduce your superannuation balance which will also reduce the earnings subject to future Division 296 tax.
Planning options?
Despite Division 296 being an additional tax on superannuation, affected individuals will have to contemplate their overall situation and especially their applicable tax rates. For many, superannuation will remain an appropriate structure to hold their wealth and generate income compared to their individual names or other investment structures.
For example, an individual with $4 million in superannuation will have a total effective tax rate of 18.75%, being 15% superannuation tax plus 3.75% for Division 296 (15% x $1 million / $4 million).
The same individual, when in pension mode, will have a total effective tax rate of 11.625% comprising of:
- 0% for the first $1.9 million in pension mode
- 7.875%, being 15% on the remaining $2.1 million / $4 million
- 3.75%, for Division 296 being 15% x $1 million / $4 million
Outside of superannuation, the first marginal tax bracket inclusive of Medicare Levy will apply a starting tax rate of 18%.
Depending on the nature of your investments, there could be a planning opportunity between choosing to invest inside superannuation vs outside of superannuation:
- Income based investments could favour inside superannuation as income would be subject to lower overall tax rates
- Capital based investments could favour outside of superannuation as capital would only be subject to capital gains tax when the investment is actually sold as compared to unrealized capital gains under Division 296
Finally for some individuals, the response to Division 296 will be to withdraw balances from their superannuation accounts. The consequences of such actions will also inadvertently address another form of taxation applicable to superannuation being death benefits tax. Upon death of an individual, superannuation will form part of the balances inherited by the beneficiaries of the deceased. Beneficiaries comprising of a spouse or children under the age of 18, there is no tax liability involved. However for beneficiaries such as adult children, such inheritances of superannuation balances can attract a 15% death benefit tax. This can materially reduce the value of family wealth passed from one generation to another. Where the same balance is held outside of superannuation, death benefit tax will not apply at the time of inheritance. Such beneficiaries will only subject to tax when they ultimately sell the inherited assets. Considering these issues as part of your estate planning is equally as important, if not more when taking into account the tax liability involved, compared to Division 296.
Division 296 certainly signals a shift in Australian tax policy. Nevertheless, even once the legislation is passed (if at all), there will remain plenty of time ahead of 30 June 2026 for individuals to assess their circumstances and make plans for dealing with the impact of Division 296.
Author
Jakin Loke
Director – Ecovis Clark Jacobs