Background
In 2023 the Albanese government announced a plan to impose a new Division 296 tax of an additional 15% on members with more than $3.0M in superannuation.
This proposal received widespread public and political opposition and was eventually rejected by the senate. However since the recent federal election results there is increasing speculation that this legalisation will be reintroduced.
The original proposed start date was 1 July 2025, however with parliament only recently reconvening this start date would likely need to be applied retrospectively.
Why is Division 296 controversial?
Unprecedented taxation on unrealised gains
One of the main points of contention is the tax would apply to unrealised gains, meaning members could be taxed on an increase in their superannuation investments even if they haven’t sold them to realise those gains. Given investment valuations regularly fluctuate and unlisted investment valuations, such as property, can be subjective, this opens the door for significant and unfair tax consequences.
Liquidity issues
Self managed superannuation funds with a large proportion of illiquid assets could face difficulty meeting the proposed tax liabilities and additional financial stress in times of significant valuation changes.
Increasing impact
The original legislation did not index the $3.0M cap, meaning over time an increasing number of people would be impacted by the new tax.
Furthermore, the Greens publicly promoted a lower threshold of $2.0M, which has created some concern the cap could be reduced and impact substantially more individuals.
Administrative complexity
The proposed tax would introduce additional and complex calculations and reporting, which would ultimately increase the administrative burden and costs for super fund members and trustees.
Potential strategies
Wait
Even with a proposed start date of 1 July 2025, the end date for calculating any Division 296 tax is 30 June 2026 with tax payable in the 2026/27 financial year. This provides some time to wait and see if the legislation gets approved and how it is to be calculated.
Review asset allocation
Members potentially impacted could review their mix of assets within superannuation, with prioritisation given to those investments with liquidity or more stable capital values.
Consider other structures
One possible strategy to mitigate the proposed tax could be, for those who have met a condition of release, to withdraw funds from superannuation and reallocate across other structures with a lower tax rate, such as a family trust, company, insurance bond or holding assets in personal names.
Reduce superannuation contributions
Based on a member’s projected superannuation balance, there could be merit in reducing superannuation contributions to enable them to remain under the Division 296 threshold.
Summary
The impact of the proposed Division 296 tax and effectiveness or relevance of the potential strategies will depend on an individual’s circumstances. Furthermore, without knowing the specific details of how or when the proposed tax will be re-introduced, it is important to not react to soon and potentially miss out on the taxation benefits that superannuation still offers.
Due to the potential long term implications of the new tax and the complexities involved it is recommended to seek advice from an adviser who can tailor a strategy to your own circumstances.
