On 3 October 2023, the Federal government released draft legislation to introduce a new tax where an individual has accumulated superannuation balances over $3 million. The bill is called the Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023.
Summary of the proposed new legislation
The draft bill proposes a new Division – Division 296 – which will apply to individuals whose Total Superannuation Balance (TSB) exceeds the $3 million threshold. TSB includes all superannuation balances – your member balance in industry super, retail super and in any self-managed superannuation funds. These changes are set to start on 1 July 2025.
If your TSB crosses that $3 million threshold, your superannuation earnings on these excess balances (calculated to include unrealised gains) may result in Division 296 tax at the rate of 30%. Earnings on balances up to $3 million continue to be taxed at 15%. Starting with 30 June 2026, the new provisions will require you to calculate your TSB at the end of each financial year.
Division 296 tax will be levied directly on individuals and imposed separately to personal income tax, superannuation fund tax and Division 293 tax.
Individuals will have the option of paying their tax liability by either releasing amounts from their superannuation fund or using amounts outside of the superannuation system.
Your superannuation earnings for Division 296 purposes will be based on changes in your opening and closing TSB, factoring in specific member withdrawals and contributions made throughout the period.
Negative superannuation earnings from balances above $3 million will be carried forward and used to reduce the amount of superannuation earnings subject to Division 296 tax in future income years.
It is not difficult to see how disruptive this new measure will be not only for the SMSF sector but for small business operators and the broader community.
Quote source: SMSF Association
The draft legislation does not provide for the $3m TSB threshold to be indexed.
The submissions from significant industry bodies
The consultation process associated with the exposure draft legislation ended on 19 October 2023. Many industry bodies expressed concerns on the short consultation period afforded to this exposure draft legislation because the changes proposed are significant, complex and in need of careful review.
Australian Super, SMSF Association, Association of Superannuation Fund of Australia, National Tax and Accountants Association (NTAA), Chartered Accountants Australian and NZ (CAANZ), The Tax Institute and Institute of Public Accountants, were among the few that managed to make a submission to the government on the exposure draft legislation. While each submission differed in certain aspects, there were some concerns that were common across all submissions.
Common issues were the inclusion of un-realised capital gains in the calculation and a lack of a mechanism to increase the $3 million threshold over time, either by indexation or regular parliamentary review. This is viewed as important given the long term horizon of people’s superannuation savings.
This is an unorthodox approach, in the context of Australian taxation arrangements, and one that should not set a precedent for the taxation of superannuation or personal income tax more broadly
Quote source: AFSA (Association of Superannuation Fund of Australia).
The submission from National Tax and Accountants Association (NTAA) noted:
“There is currently no mechanism by which a capital gain triggered on the disposal of a fund asset can be reduced on the basis that un-realised gains in relation to that asset have previously been taxed at 15% under proposed Division 296. This means that the same gain in respect of a fund’s asset can potentially be taxed twice, as follows:
- Firstly, at 15% as part of the superannuation earnings calculation for an income year under proposed Division 296; and
- Secondly, at 15% (or at 10% for a discount gain) when the fund’s asset is eventually disposed.
The NTAA urges the Government to amend the proposed methodology for calculating an individual’s superannuation earnings for an income year so that un-realised capital gains for an income year are not subject to Division 296 tax. Alternatively, the existing proposal should be amended to allow a realised capital gain in respect of a fund’s asset to appropriately reduced when the asset is eventually disposed of, to avoid the same capital gain being subject to double taxation.”
The submission from Chartered Accountants Australia and New Zealand (CAANZ) noted:
“The design of this policy taxes un-realised gains at an additional 15% each year. When these assets are disposed of they will incur an additional 10% tax if the asset is held for more than 12 months. This makes a total tax take of 25%.
This is higher than the 23.5% tax rate that would apply to the net capital gain for an individual who personally held an asset for more than 12 months who is being taxed at the highest individual marginal tax rate plus Medicare.
Many people who will face the additional superannuation taxes will be making a judgement as to whether they should keep their large superannuation balance in the system or invest in some other way.”
“We expect that some superannuation funds, and individuals, may struggle to pay the tax liability as their fund may lack sufficient cash flow. This may arise when the market value of an asset increases unexpectedly compared to the income that the asset typically earns.
This is likely to arise with different types of real estate especially commercial, retail and rural properties. Many small to medium enterprises – for example, farmers, tradesmen and women, pharmacists, medical doctors and surgeons – hold their business premises in a superannuation fund or related entity under the long-standing business real property exception to the in-house asset rules in the superannuation law. This will have a large impact on this critical sector of the economy and is an unacceptable outcome.”
We consider that the practical and financial impact of taxing a gain that is yet to be realised outweighs any perceived macroeconomic benefits and sets a dangerous precedent for our taxation and superannuation systems more broadly.
Quote source: The Tax Institute.
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This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.