What is the Division 296 Super Tax?
The Division 296 super tax is a Federal Government proposal to impose an extra 15% tax on certain superannuation earnings. This tax would apply to individuals whose total superannuation balance (TSB) exceeds $3 million at the end of an income year.
Although the measure is not yet law, the government aims to implement it starting from 1 July 2025, with the first potential tax bills issued after 30 June 2026. Whether the legislation will pass without changes or at all remains to be seen.
How the tax works
If this proposal becomes law, here is how it might apply to you:
- Eligibility: Your TSB includes the sum of all superannuation accounts, such as APRA funds, SMSFs, and defined benefit schemes.
- Threshold: If your TSB exceeds $3 million at 30 June of any given year, a portion of your earnings above this limit could attract an additional 15% tax.
- Earnings definition: This considers the annual net growth in your super balance, adjusted for contributions and withdrawals. Certain excluded amounts, such as personal injury settlements, do not count.
- Payment options: The tax would be assessed personally and could be paid from your super fund or other personal funds.
Example scenarios
To make this clearer, here are two examples of how the tax could work in practice:
Sam’s Case
- Super balance at 30 June: $4 million
- Annual growth: $120,000
- Taxable portion: 25% of that growth (calculated as the proportion of balances over $3 million)
- Tax payable: $4,500 ($30,000 taxable earnings x 15%)
Lisa’s Case
- Lisa’s balance rises from $2 million to $4.5 million after inheriting a death benefit pension.
- The taxable earnings will only include new investment growth, as transferred amounts are excluded. However, her TSB exceeding $3 million means she could still owe tax at the higher rate.
What you can do to prepare
If you are likely to be affected, it’s a good idea to review your situation now. Here are some steps to consider:
1. Assess your super balances
Make time to calculate your total combined super balances across all funds, including defined benefit schemes if applicable.
2. Plan for liquidity
Since this tax may be payable directly from your fund, ensuring there is enough liquidity within your super to cover potential tax payments is essential.
3. Valuation updates
Keep your asset valuations up-to-date, especially for self-managed super funds (SMSFs). Accurate valuations are crucial for calculating your TSB and tax liability.
4. Get professional advice
Before making significant changes, it’s important to seek tailored financial advice. We recommend speaking with a financial planner at Lead Advisory Group, who can help you evaluate your options and minimise your tax exposure effectively.
Other points to note
It's important to remember that these measures are still under discussion and could change as the legislation progresses through Parliament. Despite this uncertainty, early preparation will help you stay ahead and reduce potential stress.
We’re here to help
While the Division 296 super tax may seem daunting, understanding its implications is the first step in making informed decisions for your financial future. If you have questions or need personalised advice, don't hesitate to contact one of our financial advisors at Lead Advisory Group.
By staying proactive and informed, you can confidently plan for changes and ensure your superannuation continues to support you in retirement.
