There has been a lot of talk around the proposal starting 1 July 2025 to tax the proportion of earnings for balances above $3 Million at an extra 15% – It’s called Division 296 tax.
The draft legislation was introduced into parliament in December 2023 but may / will face opposition in the senate particularly around including unrealised gains in the calculation of earnings which is a first in the Australian tax system (aside from some very specific and targeted anti-avoidance attribution provisions).
At this stage, the draft legislation has been referred to the Economic Legislative Committee for analysis and reporting by 10 May 2024.
The three big controversies
- The plan to include unrealised capital gains in the earnings calculation to be taxed (alternatives that could be looked at is to just have ‘actual earnings ‘or a ‘deemed earnings’ rate)
- There is no plan to index the $3 Million balance amount.
- Like companies, losses only carry forward, not backwards; if in year 1 there is positive earnings and there is extra tax paid, there is no refund of tax in year 2 if year 2 happens to have loss / negative earnings. The loss will carry forward and never be utilised if the fund is in a state of natural decline.
Nonetheless this new proposal (with or without amendments) is likely to be legislated in the next few months (with a start date of 1 July 2025)
Remember that it’s on a per member basis and not a fund basis. If an SMSF has $7m with 2 members and one person has $6m and the other $1m, then only the one member with $6m is subject to these changes. The other key point is that it is based on total superannuation, so having $2m in one fund and $2m in a second fund will not exclude someone from these rules.
How it will work
There are 3 parts to the calculation:
(TSB = Total Superannuation Balance)
- Earnings (= TSB current financial year less TSB previous financial year + withdrawals – Net Contributions)
- Proportion of earnings above $3Million (= TSB current financial year less $3million / TSB)
- Tax liability (= 15 per cent x Earnings x Proportion of Earnings)
This is an example of how it will work:
Daniel’s TSB on 30 June 2026 had grown to $3,800,000. On 30 June 2025 TSB was $3,200,000
Let’s say Daniel has had no withdrawals (he hasn’t met a condition of release and is not in pension phase). He made contributions of $300,000.
- Earnings will be $300,000 ($3,800,000 less $3,200,000 add $0 (withdrawals) less $300,000 Contributions)
- Proportion of earnings above $3Million = 21.05% ($800,000 / $3,800,000)
- Tax liability is $9,472.50 (15% x $300,000 x 21.05%)
As you will see from the above, the tax rate above is not actually 15% (for this level of super balance it’s 3.15% ($9,472.5/$300,000). This tax liability will be assessed directly to the member, and they will have the opportunity to elect for their superannuation fund to pay this amount on their behalf.
In a future article we will explore any opportunities to reduce the tax (such as reducing the total super balance prior to year-end)
If there are any questions regarding the measure or you want to discuss any planning opportunities in relation to it, please contact us.
