Earlier this month, the Government released its draft legislation on the proposed new additional tax on superannuation balances above $3m from 1 July 2025, and decided to call it the “Division 296 Tax”.
Though these remain proposed measures and still far from being legislated, there is definitely a sense of uneasiness amongst SMSF members and the superannuation industry.
Recap – How is Superannuation Currently Taxed Versus What Are The Proposed Changes?
The tax on earnings within a SMSF depends on whether the members are in accumulation phase or retirement phase:
| Current rules | Tax on Earnings | What is taxed – definition of earnings |
| Accumulation | 15% | Applied to the fund’s taxable income including realised capital gains on investments that have been sold. |
| Retirement phase | 0% subject to the General Transfer Balance Cap of $1.9m# |
| Proposed Rules – for Super Balances > $3m only | Tax on Earnings | What is taxed – definition of earnings |
| Accumulation | 15% | Additional 15% on proportion of applied earnings for total superannuation balances above $3m, for each member. A new meaning of “earnings” to include unrealised gains (and losses), in addition to any realised capital gains, as part of calculating the $3m. |
| Retirement phase | 0% subject to the General Transfer Balance Cap of $1.9m# |
If you’ve had retirement income streams prior to 1 July 2023, this will be up to your Personal Transfer Balance Cap and not the General Transfer Balance Cap.
Where are we now – what is in the draft legislation?
As with all proposed legislation these measures need to go through the normal parliamentary process prior to being legislated, but this is what we have so far:
- When will this tax apply?
The first year of application will be the year ended 30 June 2026 where a member’s total superannuation balance (TSB) is greater than $3m and there has been an increase in their TSB at the end of the following year, the Division 296 Tax will apply.
- Is it an additional 15% tax on earnings? How is the tax calculated?
No – the additional tax only applies to a proportion of earnings above a member’s TSB above $3m.
This proportion is determined by comparing the member balance at the end of the relevant year to the $3m threshold as a proportion of that year end balance. For a clearer understanding, let’s look at the following example extracted from the Treasury fact sheet:
Warren is 52 with $4 million in superannuation at 30 June 2025. He makes no contributions or withdrawals. By 30 June 2026 his balance has grown to $4.5 million.
This means Warren’s calculated earnings are: $4.5 million – $4 million = $500,000
His proportion of earnings corresponding to funds above $3 million is:
($4.5 million – $3 million) / $4.5 million = 33%
Therefore, this tax liability for 2025-26 is: 15% × $500,000 × 33% = $24,750
- Taxation of unrealised gains and cashflow implications
Funds with “lumpy” or illiquid assets like property may have difficulties in paying this tax if they don’t have sufficient levels of cash available. Furthermore, there will be no tax refund the following year should the investments experience negative earnings however they can be used to offset future positive superannuation earnings
- Who is liable for this tax – the member or the super fund?
The Division 296 Tax will be levied at the member level and not the super fund, and they will have 84 days to pay. The member will have the option to withdraw the money under a “release authority” arrangement from the super fund and will have 60 days to make this election from one or more of their super funds to pay this tax.
At this stage, there is no option to defer payment of the tax unless it’s a defined benefit fund. A small consolation is a reduced rate of general interest charge will apply to outstanding Division 296 Tax at the base interest rate plus 3% instead of the usual 7%.
- Are there any exceptions – when will the Division 296 Tax not apply
- the member dies during the year – their Division 296 Tax will be $0* regardless of their TSB movement in the year of death;
- the member receives a structured settlement contribution (in any year) due to personal injury;
- they are a child recipient of a superannuation income stream at the end of the year.
*This exemption only applies if the deceased member’s super has not been dealt with by year end. For example, if any reversionary pension or death benefit pension has been transferred to the surviving spouse, this will be counted towards the spouse’s $3m threshold.
Where to from here?
Treasury only gave a two week window for responses to the draft legislation to be submitted and this has since closed – somewhat short for what is expected to be one of the biggest shake-ups in superannuation tax to date. We await the next stage of the legislation.
Author: Anna Wong – Senior SMSF Manager at Premier SMSF Solutions
*Correct as of 30 October 2023
*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is for general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this article, it is imperative you seek specific advice relating to your particular circumstances. Liability is limited by a scheme approved under professional standards legislation.
