Understanding Division 296 tax, the $3 million Superannuation Tax

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The Australian Government has proposed a new tax measure, known as Division 296 tax, or colloquially known as the $3 million Superannuation tax. It is aimed at modifying the tax treatment of superannuation balances exceeding $3 million. Set to commence on 1 July 2025, this policy has sparked considerable discussion among financial professionals and affected individuals.

Key Features of Division 296

Additional Tax Rate: An extra 15% tax will apply to the earnings on the portion of an individual’s total superannuation balance (TSB) that exceeds $3 million.

Inclusion of Unrealised Gains: Notably, the tax encompasses unrealised capital gains, meaning increases in asset values that haven’t been sold or realised will still be taxed.

Threshold Non-Indexed: The $3 million threshold is not indexed to inflation, potentially bringing more individuals into the tax net over time as their superannuation balances grow.

Effective Date: While the tax is slated to take effect from 1 July 2025, the first assessments will be based on balances as of 30 June 2026.

Implications for Superannuation Holders

Approximately 80,000 Australians are expected to be directly affected initially. However, due to the non-indexed threshold, this number could rise over time. Individuals with self-managed super funds (SMSFs), particularly those holding illiquid assets like property or shares, may face challenges in meeting tax liabilities without selling assets.

The inclusion of unrealised gains has raised concerns about potential cash flow issues, as individuals might be taxed on increases in asset values without having actual income to cover the tax.

This is also in stark contrast to current taxation laws where you are not taxed on unrealised gains, i.e. the increase in the value of an investment, until it is sold. This can cause significant holding costs compared to holding investments in other structures.

Criticisms and Concerns

Complexity and Fairness: Critics argue that taxing unrealised gains introduces complexity and may be perceived as unfair, especially when compared to the treatment of other investment vehicles.

Administrative Burden: Calculating the tax, especially for funds with defined benefits or illiquid assets, could lead to increased administrative and audit costs.

Potential Impact on Investment Decisions: There are concerns that the tax could influence investment behaviours, potentially discouraging investment in certain asset classes within superannuation.

Strategies and Considerations

If you are concerned about the impact of this tax, there are a range of strategies to mitigate the impact of Division 296. Some considerations include:

• Reviewing Superannuation Balances: Regular monitoring of superannuation balances to anticipate potential tax liabilities.
• Diversifying Investment Structures: There are a range of structures, both relatively simple and more complex to take advantage of tax laws for high-net-worth individuals. These structures may include family trusts, companies, investment bonds, or even holding assets in your personal name.
• Contribution strategies: Depending on your age there are a range of contribution strategies that you can implement to even balances out between couples.
• Estate Planning: Re-evaluating estate plans to account for the new tax implications on superannuation assets.
• Early inheritance: If you are using these assets with the aim of passing to your beneficiaries, bringing forward the inheritance could mitigate the impact of the tax.

It is important to consider that each strategy is dependent on your financial situation and your goals. An MLS Financial adviser can help you work through what is the most beneficial strategies to reduce the impact of this proposed tax.

Conclusion

The proposed $3 million superannuation tax Division 296 tax represents a significant shift in the taxation of superannuation in Australia, particularly for individuals with large balances. While aimed at enhancing equity within the superannuation system, the policy introduces complexities that warrant careful consideration and planning.

If you are concerned about the potential impact of this tax, contact MLS Financial today through our online contact form or on 1300 791 800.

Disclosures:

• This information has been compiled from sources considered to be reliable, but is not guaranteed.
• The information contained on this website is of a general nature only and neither represents nor is intended to be specific advice on any particular matter. MLS Financial and Infocus Securities Australia Pty Ltd strongly suggests that no person should act specifically on the basis of the information contained herein but should seek appropriate professional advice based upon their own personal circumstances.