Following on from our September article, the government has now issued its draft legislation for the new Division 296 tax on individual member super balances over $3m. The calculation methodology is broadly as per our last article and is a 15% tax on the amount over $3m in superannuation. This is a complex tax and potentially taxes unrealised capital gains. This new Division 296 tax will also be the only tax on unrealised capital gains in Australia.
The Division 296 tax, once legislated, comes into force from 1 July 2025 and will affect the 2025/26 and subsequent financial years.
So what are some of the main situations that the new Division 296 tax rule will impact?
- Those with property holdings in their SMSF. Where end of year property valuations increase the members super fund value over $3m on 30/6/2026, a personal tax bill will be payable. If, in subsequent years, the property valuation decreases then any losses will be carried forward against future year capital gains and losses will not be refunded to the taxpayer by the ATO.
- Those who have speculative investments in their SMSF, like venture capital or speculative stocks. These investments may experience big increases in value in one year and a large decrease (possibly permanent) in value in future years. This may result in paying the new Division 296 tax on unrealised capital gains in one year and not being compensated for this tax payment when the values decrease.
- Those super members who receive a reversionary pension from their deceased spouse which increases their super balance over $3m.
- Those super members who have low liquidity in their super fund and outside super. Imagine having a super balance of $3m and then an increase in property valuation of $1m takes your balance to $4m and you are then asked to pay Division 296 tax of $37,500, even though the property has not been sold!
- Those under 65 who have not yet met a condition of release, will likely not be able to access their superannuation to restructure their financial affairs to minimise the tax.
- The $3m level is not indexed so it is expected a greater number of super fund members will be affected in future years.
Unfortunately governments will keep changing the rules of superannuation, but it is important to remember that superannuation is an effective low tax structure which allows wealth to grow over time.
The legislation has not yet been passed by Parliament and is therefore subject to change. There will also be a federal election prior to the proposed start date of 1 July 2025. However, we believe it is prudent for clients to commence planning in the 2023/24 financial year for any necessary actions.
In our article next month, we will discuss some strategies that may be considered to reduce the impacts of the new Division 296 tax.
In the mean-time, if you would like to discuss further, please reach out to the BYRONS Wealth Management team or your BYRONS contact.
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