The Federal Government has proposed an additional tax in the superannuation space, targeting super funds with balances over $3 million. Draft legislation for this new tax, currently known as Division 296 Tax, was released on 03 October 2023.

If approved, Division 296 Tax will be introduced from 01 July 2025 and will first apply for the 2025-2026 financial year. The proposal is that superannuation funds (including SMSFs) with member balances greater than $3 million will have earnings above the $3 million threshold taxed at 30% (rather than the current 15% tax rate). Earnings up to $3 million will continue to be taxed at 15%.

Below is a broad summary of the key points of this draft legislation. It's important to note that the draft legislation remains subject to further comment and review, so there could be changes to the proposed framework of Division 296 Tax.

Who will be impacted by Division 296 Tax?

• Individuals with a total superannuation balance (TSB) across all superannuation accounts held by the member that exceed $3 million.
• In the case of a jointly held super fund, a couple can still have up to $6 million in superannuation before being impacted (provided there is an equal balance split with no one member exceeding $3 million).
• Defined benefit interests will be included within this measure, however specific rules will apply as to how the tax is calculated and payable.

For the purpose of the proposed Division 296 Tax, an individual's total superannuation balance will specifically exclude:

• Limited recourse borrowing arrangements (LRBA) which are otherwise included in a TSB;
  In-transit rollovers;
• Interest in a foreign superannuation fund;
• Receipt of a superannuation income stream because of the death of another person.

(Note: This list of exclusions from Division 296 Tax is not exhaustive.)

How will Division 296 Tax be calculated?

For members with a TSB in excess of $3 million at the end of a financial year, a 15% (additional) tax is proposed to be levied on the movement between the member’s opening and closing total balances for the year (after adjusting for withdrawals, contributions and other specific exclusions). This movement is referred to as the 'earnings' amount.

The process ensures that the additional tax is only calculated on the proportion of assets over the $3 million balance.

The calculation method in the draft legislation is as follows:

Step 1: Calculating Earnings

Earnings = (TSB current financial year end + Withdrawals – Net Contributions) – TSB previous financial year end

Step 2: Calculating the proportion of earnings on balances over $3 million

Proportion of Earnings = (TSB current financial year end - $3 million) ÷ TSB current financial year end

Step 3: Calculating Division 296 Tax

Tax Liability = 15% x Earnings x Proportion of Earnings

The issue of unrealised gains and losses.

Given a member’s total superannuation balance includes unrealised gains or losses, this will effectively mean that the additional 15% tax will also be calculated on movements in unrealised asset valuations during a relevant year. This may cause cash flow problems, as tax may have to be funded on assets that are yet to realise their value.

Where there are negative earnings during a financial year, this loss will be carried forward to be offset against future 'earnings'. There is currently no mechanism to carry back a negative earnings amount where in one financial year there is an unrealised gain and in a future year there is a loss.

There is no mechanism for the $3 million threshold to be indexed.

Division 296 in practice.

Division 296 Tax will be levied to the individual member rather than the superannuation fund.

Essentially the ATO will issue an assessment to the member personally to impose this additional 15% tax. The individual member will then be able to elect to settle this additional tax personally or withdraw it from their superannuation fund. Members with multiple funds can also choose which fund the tax is to be paid from, using the usual release authority mechanism.

There will be no limit on the size of a member’s total superannuation balance and therefore the member will not be required to withdraw funds in excess of the $3 million threshold.

As noted earlier, there are specific rules in relation to how Division 296 Tax is calculated in respect of defined benefit interests. For those impacted, we can provide further specific information on how it will apply to you.

One last thing.

Division 296 Tax on superannuation balances is still in draft form, so there is no need to react in the short-term by withdrawing funds from your super to fall under the $3 million threshold. If and when this new tax does pass legislation, the first critical date to consider will be 30 June 2026 - and we'll be in contact about your options long before then.