What is Division 296 Tax?
Division 296 tax is a new superannuation tax measure that was introduced by the Australian Government, targeting individuals with super balances exceeding $3 million. Under this new tax measure, individuals with more than $3m super balance, will be subject to additional 15% tax on earnings associated with the portion of superannuation balances above the $3 million threshold. These earnings included both realised and unrealised gains whether the assets were sold or not.
What Has Changed?
After months of debate and industry feedback, the Government has finally revised its proposed Division 296 tax legislation. The changes reflect a more balanced approach to taxing high superannuation balances, with key updates that address concerns around fairness, practicality, and timing.
Key Superannuation Tax Changes Announced
- Delayed Start Date:
The new Division 296 tax will now commence from 1 July 2026, with the first assessment date being 30 June 2027. - Tiered Tax Thresholds Introduced:
- 15% tax on earnings attributable to super balances over $3 million
- Additional 10% tax (adding upto 25%) on earnings attributable to balances over $10 million
- Indexation of Thresholds:
Both thresholds will be indexed to inflation, increasing in jumps of $150,000 and $500,000 respectively. - No Tax on Unrealised Gains:
A major win for members – earnings for Division 296 purposes will exclude unrealised capital gains, removing the risk of tax bills without liquidity. However, there is still uncertainty around how realised vs. unrealised gains will be treated, especially for assets held before the start date.
How Will Earnings Be Calculated?
Super funds will calculate earnings based on taxable income, aligned with existing tax principles. There’s flexibility for funds to use a “fair and reasonable” approach, especially for large or complex funds. We will have to watch the space for more details around capping realised gains post 30 June 2026 and how the valuation methods will be applied to different asset classes.
Impact on Defined Benefit Members
Defined benefit pensions will now be valued using family law valuation methods, replacing outdated formulas. This change affects both SMSF and non-SMSF members and may significantly alter total super balance calculations.
Example: Impact of Division 296 on a $12 Million Super Balance
To illustrate the impact of the new tiered Division 296 tax system, consider a member with a $12 million superannuation balance as at 30 June 2027.
Under the revised rules:
– 75% of the members’ super is over $3m ($12m – $3m is $9m, bringing it to 75% of total super balance of $12m), and
– 16.67% of the members’ super is over $10m ($12m – $10m is $2m, bringing it to 16.67% of total super balance of $12m)
– The fund generated a combination of general income and realised capital gains, of which $700,000 is attributed to the member. The fund has already paid 15% tax on this taxable income.
Calculation of Division 296 tax:
– $700,000 × 15% × 75% = $78,750
– $700,000 × 10% × 16.67% = $11,669
Total Division 296 tax payable: $78,750 + $11,669 = $90,419
This example highlights the importance of strategic planning for members with high superannuation balances to manage tax liabilities effectively.
Final Thoughts
While the revised Division 296 tax is a step forward, it still presents challenges – especially for those with super balances exceeding $10 million. The removal of unrealised gains from the tax base is a welcome relief, but the higher tax rate and complexity of earnings calculations mean strategic planning is essential.
Please reach out to MGI tax accountants and consultants if you have any questions or contact us on (07) 3002 4800.
