Navigating Division 296 

With this year’s Federal Election resulting in a continuing Labor Government, we expect the proposed tax on larger superannuation balances will once again be put under the spotlight. The Better Targeted Superannuation Concessions bill must now recommence the legislative process, passing through the House of Representatives and subsequently the Senate. With the Senate composition now confirmed, Labor only needs the support of the Greens to push through the proposed new tax. That said, the Greens have previously been strong proponents of reducing the $3 million to $2 million on which Labor have been unwilling to budge.

The reintroduced legislation may not be identical to the previous version, and the proposed start date could be subject to change. Even if the start date remains 1 July 2025, the amount of tax payable will largely depend on the value of an individual’s superannuation as of 30 June 2026. This is because the tax calculation formula uses the percentage of a member’s superannuation that exceeds $3 million at the end of the financial year. If this percentage is zero or close to zero, the tax liability will be minimal or even nil.

Given these uncertainties, it is important to stay informed and prepared. If the legislation does pass the houses unchanged and the start date remains at 1 July 2025, there will still be time to take any necessary actions.

Update re: TSB and DBs

If the initial draft legislation remains unchanged, it will have broader implications for superannuants with defined benefit interests by redefining Total Superannuation Balance (TSB).

What was previously a simple calculation based on a multiple of 16, the new legislation adopts a more accurate family law valuation of defined benefit pensions for the purpose of TSB assessments. This approach is also expected to apply to defined benefit members who are still contributing.

The new definition will apply to all members with interests in defined benefit schemes, impacting both high and modest balances. One of the most notable consequences is that some individuals may become ineligible for non-concessional contributions or opportunities such as catch-up concessional contributions.

Additionally, the redefinition may have flow-on effects on individual Pension Balance Transfer Caps (PBTC), further influencing superannuation planning strategies.

Given that Division 296 introduces changes beyond just a new tax, careful planning and strategic advice will be crucial to navigating these reforms effectively.

Summary of the proposal

The Better Targeted Superannuation Concessions legislation proposes an additional 15% tax on earnings and capital gains for superannuation balances above $3 million. If the legislation passes, it’s expected to take effect from 1 July 2025 and is projected to affect 80,000 Australians.

Under current rules, the most tax an individual would pay on superannuation earnings is 15%. Individuals impacted by the changes could pay as much as 30% tax on their superannuation earnings and capital gains.

For example, say ‘Andrew’ has $5.5 million in super by 30 June 2025.

• His balance grows to $6 million by 30 June 2026 with investment earnings and unrealised capital gains.
• Andrew makes no contributions or withdrawals during the year. Therefore, his calculated earnings are $500,000.
• As 50% of Andrew’s account balance is over $3 million, 50% of the calculated earnings ($250,000) will be taxed an extra 15% (an effective tax of 30%).
• This would result in an extra $37,500 in tax, which Andrew could pay personally or from his super fund.

It’s essential to highlight that unrealised capital gains also count as earnings for the purposes of this cap. Where this may create an issue is if the super fund has insufficient liquidity to pay the tax bill, which may require a sell down of assets or the tax bill being paid personally.

Start planning now

For couples, this proposal emphasises the importance of equalising super balances.

Take ‘David and Mary’, for example.

• David has $4 million in super, so 25% of his super investment earnings will be taxed at 30%.
• Mary has only $1 million in super.
• Suppose David worked with his wife to implement various rebalancing strategies across multiple financial years. They may get David’s balance below $3 million and Mary’s to $2 million.
• Effectively, their efforts could allow them to have all their superannuation investment earnings taxed at only 15%.

‘Even if your super balance is currently under $3 million, consider how investment earnings and contributions over the next few years could propel your balance above this mark.’

Longer-term considerations

While few individuals have super balances over $3 million, if one member of a couple passes away, the surviving spouse’s resulting super balance may easily tip over.

Take ‘Sue’, for example.

• Sue has $1.7 million in super accumulation.
• She recently received a death benefit income stream from her late husband with a balance of $1.5 million.
• Now, she has a total super balance of $3.2 million, meaning some of her superannuation earnings will be taxed at 30%.
• While Sue cannot rebalance her superannuation, there are other options she could consider. For example, she may benefit by withdrawing some of her super and investing it personally or in another entity (such as a trust), provided the tax rate is less than 30%.

The potential long-term tax savings may be significant enough to outweigh any additional costs or complexities associated with these arrangements. In other words, it’s worth exploring these strategies now.

Seek specialised super advice

The restrictions on contribution caps mean rebalancing strategies may need to be implemented over multiple consecutive financial years. This means that even younger people can benefit from planning early. Read more about planning rebalancing strategies here.

With contribution limits expected to change, careful planning and expert super advice can help optimise the long-term savings of super equalising strategies.

These changes may also prompt those in similar circumstances to Sue to ensure binding nominations and overall estate plans are structured to maximise beneficiary outcomes.

Talk to your adviser if you’d like to know how these proposals may impact you and how you could benefit by taking action now.

Disclaimer 

This document was prepared by Evans and Partners Pty Ltd (ABN 85 125 338 785, AFSL 318075) (“Evans and Partners”). Evans and Partners is a wholly owned subsidiary of E&P Financial Group Limited (ABN 54 609 913 457) (E&P Financial Group) and related bodies corporate.

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