Proposed Division 296 Tax – What Is It, And How Likely Will It Come Into Effect?

A brief recap – what is the Division 296?

The proposed Division 296 tax in Australia, set to take effect from 1 July 2025, introduces an additional 15% tax on the earnings of superannuation balances exceeding $3 million. This measure is part of the government’s effort to target larger superannuation accounts, and will affect individuals whose total superannuation balance (TSB) surpasses this threshold.

Key aspects of the Division 296 tax include:

1. Tax scope: The tax applies to a proportion of an individual’s superannuation earnings, including unrealised capital gains, which are attributed to the amount exceeding $3 million.

2. Calculation: The amount of tax is determined through a series of calculations based on the individual’s TSB at the end of each financial year. These calculations consider the individual’s superannuation growth and any contributions or withdrawals made during the year.

3. Payment options: Individuals can choose to pay the tax directly or opt to have it paid from their superannuation account. The Australian Taxation Office (ATO) will calculate the liability, and individuals will have a specified period to make the payment or request a release of funds from their superannuation.

4. Impact: This tax is designed to ensure that only the earnings on balances above $3 million are taxed. It doesn’t impact the overall tax or income tax position of superannuation funds themselves, nor does it affect the use of franking credits by these funds, but is rather a tax levied on the individual.

5. Exceptions: Certain individuals, such as child recipients of superannuation income streams or those involved in structured settlements, may be exempt from this tax.

Illustrative example on how the tax will apply

Scenario:

• Super balance at start of year: $3.5 million
• Super balance at end of year: $3.7 million
• Contributions made during year: $100,000
• Withdrawals made during year: $50,000

Step by step calculation:

1. Calculate net earnings:

To determine the taxable amount, calculate the net earnings by considering the balance changes, contributions, and withdrawals:

Net earnings = Closing balance – opening balance – contributions + withdrawals.

Net earnings = $3,700,000 – $3,500,000 – $100,000 + $50,000 = $150,000.

2. Identify portion above $3 million:

Since only balances over $3 million are subject to the Division 296 tax, we’ll calculate the applicable earnings on this portion.

• Excess balance: $3.7 million – $3 million = $700,000
• Applicable Earnings Portion: Since the tax only applies to the balance above $3 million, you would attribute earnings proportionally:

Applicable Earnings Portion = Excess Balance / Closing Balance x Net Earnings

Applicable Earnings Portion = $700,000 / $3,700,000 x $150,000 = $28,350

3. Apply the 15% Division 296 tax: The 15% Division 296 tax is then applied to this portion of earnings.
Division 296 Tax = $28,350 x 0.15 = $4,252.50

Result:

In this scenario, the individual would owe $4,252.50 in Division 296 tax for the year.

Current status and likelihood of implementation

As of the latest updates, the Division 296 Bill has passed the House of Representatives without amendments, reflecting the government’s strong push to finalise it. However, the Bill’s progression now depends on Senate approval, where the government will need support from Greens and crossbench senators to pass it.

The Senate committee has recommended the Bill’s passage despite some concerns, including opposition to taxing unrealised capital gains and a fixed threshold that lacks indexation. While some amendments have been proposed to address these issues, none have been adopted so far. Criticism from the Liberal Party and other groups focuses on potential negative impacts on small businesses and family operations, particularly in relation to how unrealised gains could affect liquidity and tax burdens on specific assets.

The government’s confidence in passing this Bill in the Senate appears firm, but crossbench and Greens’ support is still crucial for final approval.

The upcoming federal election could also impact the passage of the Division 296 tax, given the Liberal Party’s opposition to the tax.

What this means for you

If your individual superannuation member balance is below the $3 million threshold, there is no immediate impact. However, if your balance exceeds $3 million, you may be impacted by this tax. At this stage, as the Bill still requires Senate approval, we do not recommend making any adjustments until this occurs. We will provide further updates as they become available, and planning strategies if the Bill passes Senate.

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Disclaimer: This information is general in nature and should not be relied on as advice. 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 and seek professional advice before making any decisions based on this information.