Overview
With the election called and Division 296 extra tax on super balances stalled in the Senate, the current government have decided to make the contentious change to superannuation legislation an election policy.
With global turmoil currently roiling asset markets, this poorly designed amendment can potentially lead to absurd outcomes; one where superannuants could pay tax on an unrealised gain that never eventuates.
What is it again?
Division 296 is an extra 15% tax on member superannuation balances above $3 million. The government is banking on most Australians either not caring about this tax or not being affected by it. But all Australians would take umbrage paying tax on an investment return they never received. And this is the anomaly at the heart of this tax.
How does Division 296 tax work?
In its simplest form, the tax calculates a member’s Total Super Balance (TSB) at the end of a financial year, adding back withdrawals and taking off contributions. This is then compared with the member’s super balance at the beginning of the year. Any increase in the member’s account – earnings for want of a better word – is then proportionately split between earnings above and below $3 million. Earnings related to balances above $3 million are then taxed at 15%. The measure was supposed to start on 1 July 2025, but it is unlikely to be the case, given it is not even legislation now.
Case Study
Let us look at a Case Study to illustrate the concept of Division 296 tax. Matt has $5 million in super as at 30 June 2025. He has a year of solid returns, and as at 30 June 2026, his member balance has increased to $6 million. For the sake of simplicity, we will assume there have been no contributions or withdrawals for the year.
Matt’s ‘earnings’ for the income year will be $1 million (end balance of $6 million, less start balance of $5 million).
The first step is to determine how much of Matt’s balance is above the $3 million threshold as at 30 June 2026:
$6 million – $ 3million = $3 million.
Therefore 50% of Matt’s balance is over the $3 million threshold ($3,000,000/$6,000,000).
We then multiply the total earnings ($1 million), by the percentage of those earnings attributable to his balance above the $3 million cap:
$1 million x 50% = $500,000.
This is the amount that is then taxed at 15%:
$500,000 x 15% = $75,000 Division 296 Tax payable.
Let us further assume that Matt’s fund has Business Real Property as an investment – a factory worth $3 million through which Matt conducts his 4WD business.
In the following financial year (2026/2027), tough global conditions mean the property value has been revised down by an independent valuer to $2 million, a ‘loss’ of $1 million. The difficult financial conditions have impacted his super, such that Matt’s balance as at 30 June 2027 is now $4 million.
The Division 296 tax system will determine that there are negative earnings of $2 million ($4 million at the end of the year, less the $6 million at the start of the year).
This $ 2million ‘loss’ can be carried forward but only offset against future Division 296 positive earnings.
But this is where the design of the new tax is fundamentally flawed. We now fast forward to the 2027/2028 financial year, and things have taken a turn for the worse for Matt. Unfortunately, he is unable to continue working due to ill health, and the fund is forced to sell the property. Let us also assume markets are still volatile, and the property is sold for $2 million. The sale proceeds are withdrawn from superannuation in the 2027/2028 financial year, as Matt requires the proceeds to modify his home and fund other expenses.
Given market volatility and the withdrawal of the property sale proceeds, we will surmise Matt’s super balance as at 30 June 2028 is less than the unindexed $3 million Division 296 cap. If his balance does not again rise above $3 million, the carry forward Division 296 ‘loss’ of $2 million is unable to be used. This tax is at a member level, so the ‘loss’ cannot be used by the fund, or other members, to offset their tax liabilities. The ‘loss’ is quarantined and only applicable to Matt. There is also no refund or rebate for the $45,000 tax paid by him on the ‘earnings’ of $1 million in the 2025/2026 financial year.
So, we have the inequitable situation where Matt pays $75,000 tax on paper profits he never receives, but ends up crystallising a real capital loss.
Conclusion
Division 296 tax is simply bad policy. It risks Australians losing faith in our world-leading retirement income system. There are much more efficient ways to increase the tax on those with extremely large super balances (for mine, $3 million is not a large super balance, but I digress). Why not have compulsory cashing of benefits at, say, 67 years of age? That would force those with exceptionally large superannuation balances to withdraw money from the concessionally taxed super system.
The government needs to rethink taxing large superannuation balances. It should engage those who work in the industry to craft policy that efficient and equitable. Division 296 tax is neither of those.
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