SMSF advisers and trustees should not confuse the operation of calculations that determine the Division 296 tax as this may lead to them overlooking the use of withdrawals to manage the impact of the impost, the SMSF Association (SMSFA) has highlighted.
Addressing attendees at the recent SMSFA Technical Summit 2024 in Sydney, association chief executive Peter Burgess said the two different calculations, which work out the level of fund earnings and the proportion of earnings above $3 million, had been getting increased interest in recent months from fund members.
“A common question that we get asked is: ‘If I’m going to make withdrawals from my super, do I need to do it before the 2025/26 income year, because once I move into the 2025/26 income year withdrawals are just added back, so it makes no difference?’” Burgess said.
“That’s not correct because we use these different calculations that come into play with Division 296 and it’s important not to confuse these calculations.
“The first calculation is the calculation of the earnings for Division 296 purposes and what’s in the bill at the moment is based on the increase or decrease in the member’s total super balance (TSB).”
He said the calculation considered the change in TSB between the end of the last financial year and the end of the current year and that was then adjusted for withdrawals.
“We’re doing that here because if we don’t it could underestimate earnings because people could make withdrawals and reduce their earnings, so we add back withdrawals and take off contributions, and that’s how earnings are calculated for division 296 purposes,” he said.
He noted the adjusted TSB was then used in the second calculation for the proportion of earnings above $3 million and further alterations were made here as well.
“There are some things here that are being adjusted. We remove any outstanding limited recourse borrowing amount so we don’t exacerbate the balance and push it above $3 million, and the other change is replacing the transfer balance account defined benefit income streams which will be valued annually,” he said.
He said applying the second calculation, where the TSB at the end of the year minus $3 million was divided by the TSB at the end of year, showed withdrawals could be a useful strategy.
“In this formula you can see by making withdrawals you can reduce the balance potentially below $3 million so you don’t pay any division 296 tax or you can reduce the proportion that exceeds $3 million and therefore reduce the amount of tax,” he said.
“So withdrawals get added back when calculating earnings, they don’t get added back when calculating the proportion by which your client exceeds the $3 million limit. They are two separate calculations and it’s important not to confuse the two.”
