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Division 296 Tax: Masterclass top 5 questions
I recently had the pleasure of being involved in The Inside Network’s INPractice Practice and Efficiency Masterclass. This was a national roadshow designed for those within the wealth management sector to take practical steps to develop their practice through investment expertise and its application to client experience.
We had outstanding speakers covering active ETFs, the efficiencies SMAs bring to practices and the psychology of language, and I had the pleasure of speaking about the government’s proposed extra tax on individuals whose Total Superannuation Balance (TSB) exceeds $3 million. Individuals with TSBs over $3 million at the end of the 2025/26 financial year (and beyond) will be subject to an additional tax of 15 per cent on earnings.
Whilst the government has mooted this tax as a ‘modest’ change to the superannuation system, the Masterclass attendees had a very different view on the impact this tax will have on their client base.
Here are the top five questions on Division 296 tax from the INPractice Practice and Efficiency Masterclass.
1. What is the logic behind the tax?
Many attendees (which included quite a few para-planners) questioned why the tax was created in the first place? The most widely held view was this tax is going to hit middle Australia, which is not its intended target.
By way of a little (recent) history, the genesis for this new tax, outlined in the Explanatory Memorandum accompanying the Bill, is the requirement to better target those who currently receive tax concessions on large superannuation balances. Furthermore, the government has stated the superannuation system was intended to provide for people in retirement, rather than enabling some taxpayers to avoid tax and build their wealth to pass on to the next generation.
So, this new tax, in essence, has been designed to reduce the super concessions for high balance members, whilst leaving the super concessions unfettered for everyone else.
Notwithstanding Treasury’s logic (or lack thereof), there was a recurring theme within the adviser community nationwide, and that was, if this tax is to reduce superannuation tax concessions for the wealthy, could a simpler and more equitable outcome be achieved by reintroducing the compulsory cashing of benefits?
Why not introduce compulsory cashing at, say, 67 years of age? It would avoid performing the complex calculations to determine Division 296 tax (adjusted Total Super Balance, asset valuations, etc) and reduce the inequality for those who have real property assets in their fund.
Good question, and one wonders why Treasury came up with the most convoluted calculation in human history to punish a handful of boomers.
2. Why are unrealised gains taxed?
To follow on from the first question, many saw the taxing of unrealised gains as unfair and poorly designed policy.
Again, the attendees came up with a more equitable and simpler solution – if a fund can determine actual realised gains (i.e. ordinary and statutory income) applicable to a member account, why not use that figure, rather than some arbitrary amount such as that mooted?
There was widespread belief amongst the attendees that the taxing of unrealised gains was because it was quick and easy for industry superannuation funds to do. Whilst calculating actual realised gains (i.e. ordinary and statutory income) applicable to a member account was extremely difficult for Industry Funds to do and would require upgraded accounting systems to achieve this.
A few also suggested the tax was designed to impact SMSFs, which can a) determine actual realised gains (i.e. ordinary and statutory income) applicable to a member accounts, and b) consist of real property assets, making a tax on unrealised gains problematic.
Personally, I do not believe our benevolent public service would ever design a tax that favoured one type of superannuation fund over another. I have no doubt Treasury undertook an extensive analysis of various methodologies and determined the proposed methodology was the superior option (cough, cough).
3. Why is the cap not indexed?
Why not indeed?
If the tax is so badly needed to reduce the inequitable distribution of tax concessions in the super system, indexation ensures those super balances considered the preserve of wealthy increases over time, rather than having a static cap that effectively reduces over time.
The SMSF Association of Australia has conducted analysis showing that someone who is 30 now, given the time value of money, will have a superannuation balance of $3 million at age 65. Discounting that amount back to a present-day value, this is equivalent to $1 million now.
Hardly an abnormally large super balance, I’d say.
4. What are some strategies to minimise Division 296 tax?
Whilst the legislation is not yet law and may never be (see our final question below), at least in its current form, there are multiple strategies to reduce the impact of the extra tax.
Firstly, most financial planning professionals stated equalisation of member accounts will become an essential part of super planning. If one member has, say, $4m and their spouse $1m, then the option should be to even up their accounts as best as possible using a re-contribution strategy. Now that the work test has been abolished, members can make non-concessional contributions up to age 75, including making use of the bring-forward provisions (subject to the TSB and contribution caps).
Secondly, other structures were mentioned as a possible solution. Family trusts allow income to be streamed to a multitude of beneficiaries on lower marginal rates of tax (including corporate beneficiaries). Whilst this means withdrawing funds from super and creating a new tax structure, given the higher rates of tax in the super environment, this might now be a viable option.
Also, many saw withdrawing monies from a member account and then the proceeds re-contributed back to super for other family members (subject to the member’s TSB and contribution cap limits). This can be done to build super for the next generation (a form of pre-death estate planning if you like). Whilst their account balances may be subject to preservation rules, this is one way to avoid the 15 per cent extra tax on earnings and importantly lump sum death benefits tax on the taxable component when paid to adult children.
An important fact to remember is if members wish to retain the excess above the cap in the superannuation system, they can choose which superannuation interest the Division 296 tax is to be deducted from. For example, if someone has a largely tax-free superannuation interest and a largely taxable superannuation interest, they may select the taxable superannuation from which to deduct the Division 296 tax.
Finally, given people were encouraged to save for their retirement through super, many do not utilise the generous tax-free thresholds afforded to individual taxpayers. Investing in personal names could be a sound strategy, as it also avoids lump sum death benefits tax.
5. Will this proposal ever become law?
There was much debate about this. It is interesting to note that, at the time of writing, the proposed $3 million super tax legislation was put on hold again, and the sector now has to wait until the next sitting of Parliament in October 2024 to see if it is put on the schedule for its third reading in the House of Representatives.
This could be a sign the concerns raised about the tax could be filtering through the corridors of power. The government has the numbers in the House of Representatives to pass the bill, but it appears the government does not have the numbers for the Bill to pass the Senate.
What might the government do to sweeten the deal?
The easiest option would be to introduce indexation, but this still leaves the most contentious part of the tax intact; that being the tax of unrealised gains.
What does a minority government, the most likely outcome at the next Federal Election, mean for Division 296 tax? Would the government go back to the drawing board? Probably not, given the revenue associated with the tax. The Government has already banked this in the Budget, so I doubt a re-write is on the cards.
One thing clear to me from when the Bill was first introduced is the paucity of consultation time the government provided to industry (less than two weeks). Clearly the ‘powers that be’ had then, and now, no interest in producing a workable solution.
And this was the over-arching theme throughout the roadshow – it is the lack of fairness and clarity surrounding the legislation that is most disappointing for practitioners. Treasury and the government are clearly not interested with consulting industry, which has meant that, less than 12 months out from the introduction of a significant change to superannuation tax, Australians are none-the-wiser as to what that tax will be and have not been given time to effectively plan for it.
It seems a sad indictment on the whole process.
