The revised version of the Division 296 tax is likely to be more difficult to implement than the original proposal put forward by the government despite it being based on actual realised gains and introducing indexation, according to BT technical consultant Matt Manning.
Manning identified calculating the realised gains, capital gains and the treatment of defined benefit pensions would all involve more work under the proposed ‘Division 296 2.0’.
“A feature of the announcement [regarding the revision] is the tax will apply to a portion of the realised or the actual earnings,” he said during a BT adviser briefing today.
“A main criticism of the previous announcement was it applied to unrealised capital gains by virtue of the fact it looked at the increase in the total super balance (TSB). They’ve removed that, but the difficulty now is going to be attributing how much are the actual earnings because they can’t use the TSB for that.”
He noted Treasurer Jim Chalmers had flagged this as an area requiring more work, but suggested it would be a problem for most of the superannuation sector.
“What the Treasurer was getting at is the overall difficulty of attributing earnings to members, especially for industry funds, because it means applying fund-level taxation to individuals, which is not saying it can’t be done, but it’s going to be very, very difficult,” he said.
He pointed out similar difficulties will apply in regards to capital gains and the cost base that will be applied and how funds will scope out unrealised gains.
“How do we draw a line to say: ‘What about existing assets that had gains accrued before 1 July 2026 versus post that date?’” he said.
“In this case, the assets would essentially have two cost bases – one for Division 296 purposes and the other for normal capital gains tax – but that is going to be a challenge in itself.
“When the transfer balance cap was introduced we had grandfathering, but that was one layer of tax being applied. This will be two cost bases going forward and very difficult to administer.”
Lastly, he noted the government had recommitted to ensuring defined benefit pensions were also captured, but had not spelt out how that would take place.
“One thing under the original proposal was it was easy to say that for defined benefits we had a well-established formula using the 16 times pension payment figure and then look at how much the pension payment increased the tax liability based on the TSB,” he said.
“Now I don’t know how they’re going to do that. It could be done by a formula. No doubt it’s going to be a very complicated formula for this new system as with the removal of unrealised gains and the equivalent treatment for defined benefits, that’s going to make it more difficult to calculate.”
