At the time of writing, the Superannuation (Better Targeted Superannuation Concessions) Imposition Bill 2023 and Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023, colloquially known as the legislation to introduce the Division 296 tax, remain before the House of Representatives in federal parliament.
While it is expected the government will use it numbers to push the proposed legislation through the lower house, its passage through the Senate isn’t as assured. Although the Senate Economics Legislation Committee recommended the bill proceed without changes, there is likely to be opposition to certain elements of it in the upper house.
Putting that aside, based on the current reading of the bill, 30 June 2026 appears to be the date we will be drawing a line in the sand, so to speak, as this is the first ‘test date’ that will determine if an individual will be subject to the proposed tax.
Many have written before me that asset valuations on 30 June 2025 are equally important. This is due to the fact the tax will be imposed on the proportional increase in an individual’s total super balance (TSB) from one year to the next. That means any potential Division 296 tax calculations on the first test date of 30 June 2026 will be based on a change in value from 30 June 2025.
To this end, correctly recording assets at their market value as at 30 June 2025 is vital from a Division 296 tax perspective (ignoring the fact superannuation law requires assets to be recorded at their market value every year, regardless).
It may not just be about $3m at 30 June 2026
A common theme in the readings and discussions relating to the application of the tax appears to be that if you have a TSB below $3 million as at 30 June 2026, you will not need to worry about the new tax for that year.
While I largely agree with this, from a Division 296 tax impost perspective, having a TSB under the $3 million threshold should not necessarily mean you disregard the application of the proposed measure entirely.
There is an example in the bill’s explanatory memorandum relating to Jamal. In it, Jamal has a TSB on 30 June 2025 of $3.2 million that decreases to $2.8 million on 30 June 2026. He has no contributions or withdrawals for the year and the decrease in his TSB has come about due to negative earnings. Based on the application of the proposed law, this decrease of $200,000 is identified as ‘unapplied negative earnings’ and can be carried forward to be offset against future gains.
This example highlights an individual’s 30 June 2025 TSB is potentially as important as their 30 June 2026 TSB, especially if it exceeds the tax’s ‘large super balance’ threshold. It also emphasises where their 30 June 2025 TSB does exceed $3 million, a 30 June 2026 TSB below the threshold should not be ignored.
Taking benefit payments to reduce TSB to below $3m
Another area of conversation has been around strategies to reduce an individual’s TSB to below the threshold to reduce any potential Division 296 tax with an emphasis on 30 June 2026.
An area of conversation that raised several questions in a recent online workshop conducted jointly by Accurium and TaxBanter was the formula to calculate an individual’s ‘adjusted TSB’, with an emphasis on the adding back of withdrawals. The concern being what is the advantage of taking benefit payments to reduce your balance if they are going to be added back anyway.
Let’s consider this with an example and change the variables to Jamal’s situation from above. In this instance, assume he still has a 30 June 2025 TSB of $3.2 million and $2.8 million at 30 June 2026. However, let’s also assume he took a benefit payment of $500,000 during the year.
The proposed legislation states we need to determine his earnings by subtracting his prior year TSB from his current year adjusted TSB. His adjusted TSB is determined by applying the following formula:
End of year TSB + withdrawals for the year – contributions for the year.
For Jamal, this would be:
$2.8 million + $500,000 – $0 = $3.3 million.
His earnings would then be $3.3 million (adjusted TSB at end of current year) – $3.2 million (prior TSB from end of previous year) = $100,000.
This may beg the question: why attempt to find unapplied negative earnings if it runs the risk of uncovering positive earnings that will then be subject to Division 296 tax?
The answer is, where you have an actual TSB of below $3 million, you do not risk having positive earnings subject to the tax. Yes, you may determine the individual has positive earnings, but that is only one step in the process to calculating the Division 296 tax. Once you have determined there are positive earnings, the next step is to determine the portion of the individual’s interest that exceeds $3 million. The formula for doing so is:
[(End of year TSB – large super balance threshold or $3 million) / End of year TSB] x 100.
It is important to note this formula uses an individual’s actual TSB and not their adjusted TSB used to determine their Division 296 superannuation earnings. That being the case, Jamal’s dollar-value proportion above $3 million is nil and this will in turn not result in a positive proportion above $3 million. For the next step in the calculation process, being to determine the taxable super earnings subject to the tax, an individual must have a positive proportion above $3 million.
This is highlighted in the example if we consider taxable superannuation earnings is determined by multiplying the earnings calculated in the first step above ($100,000) by the percentage worked out in the second step.
This got me thinking of questions that were raised in the early days of the proposed changes and whether taking a withdrawal each year to effectively offset any growth could be a strategy to reduce the potential application of the tax. Admittedly, in those early days my initial thoughts were the process of adding back the withdrawals was going to limit the strategy. Now, I’m not so sure. Even if the withdrawals were not enough to get an individual below the $3 million threshold, there may still be benefits to the strategy if withdrawing the benefits from the superannuation system fell within your overall strategy.
Let’s look at another example. Nicky has a TSB as at 30 June 2025 of $3 million and has a strategy to withdraw any superannuation growth applicable to her each year in order to minimise or remove any Division 296 tax. Leading up to the end of the 2026 financial year, she predicts her growth to be around $250,000 and withdraws that amount before 30 June. After an unexpected increase in the value of one of the assets of the fund and receiving a larger trust distribution than anticipated, her TSB as at 30 June 2026 was $3.05 million.
Nicky’s earnings for the year will be:
$3.05m (current year TSB) + $250,000 (withdrawals) – $3m (previous TSB) = $300,000.
Her proportion over $3 million will be:
[($3.05m (current year TSB) – $3m (large super threshold)) / $3.05m] x 100 = 1.64% (the bill dictates this percentage is rounded to two decimal places).
Therefore Nicky’s taxable superannuation earnings will be:
$300,000 x 1.64% = $4920.
At a tax rate of 15 per cent, Nicky will pay $738 in Division 296 tax.
In comparison, if Nicky did not embark on this strategy and had taken no withdrawals during the year, her Division 296 tax would have been calculated as follows:
Percentage proportion over $3 million:
[($3.3m – $3.0m) / $3.3m] x 100 = 9.09%
Taxable superannuation earnings:
$300,000 x 9.09% = $27,270
Division 296 tax:
$27,270 x 15% = $4090.50
Let’s assume Nicky sticks with the strategy for another year and withdraws $305,000 and ends up with a TSB as at 30 June 2027 of $3 million. We go through the process again to determine whether she will have a Division 296 liability for 2026/27:
Earnings:
$3m + $305,000 – $3.05m = $255,000
Percentage proportion over $3 million:
[($3m – $3m) / $3.0m] x 100 = 0%
Taxable superannuation earnings:
$255,000 x 0% = $0
Division 296 tax:
$0 x 15% = $0
If you have clients who are happy to withdraw earnings from their superannuation interests each year to minimise any potential Division 296 tax, while the adding back of any withdrawals may increase the value of the ‘earnings’ to be considered, the above example shows their actual TSB at the end of the year, relative to the large super balance threshold, is also an important consideration. Being slightly over the threshold may result in Division 296 tax, but potentially only imposed on a small percentage of earnings. Dropping below the $3 million threshold, even with the add back of the withdrawals, will see no Division 296 tax, based on the current proposal for determining it.
The above is for illustrative purposes only and does not consider specific circumstances of any individuals, nor does it consider how any withdrawals may be maintained outside of superannuation and the tax implications that may come from this.
While some may see such a strategy as a small win against the proposed legislation, it is worth considering its objective, that is, for individuals to pay additional tax on larger superannuation balances or avoid having larger super balances.
Anthony Cullen is senior SMSF educator at Accurium.