You might have heard about the Federal Government’s proposed Division 296 tax. This measure would add an extra 15% tax on some superannuation earnings. It applies to individuals whose total superannuation balance (TSB) exceeds $3 million at 30 June each year.

Current Status

This proposal is not law yet. Both houses of parliament must still pass it. 

The government initially hoped for a 1 July 2025 start date on the measurement and the first tax bill would arrive after 30 June 2026. 

How Would it Work?

Let’s assume the law passes as proposed. How would it work? 

If your TSB is above $3 million on 30 June, an extra 15% tax applies to a portion of your super earnings above the threshold. 

The tax bill is sent to you personally. You can choose to pay it from your super fund or your personal funds.

Calculating Earnings

What counts as earnings here? It is the increase in your net super balance over the year. This figure gets adjusted. Certain contributions, like death benefit pensions received, are added back. Certain withdrawals are also factored in. 

Importantly, the inherited pension amount itself isn’t taxed as earnings. Only the subsequent investment growth on the full new balance is part of the earnings calculation. However, the high total balance might still trigger a tax liability.

Your Total Super Balance

Remember, your TSB includes all your Australian super interests. It combines APRA-regulated funds, SMSFs, and defined benefit schemes. The value is taken at the end of the financial year.

Key Dates

If the start date is 1 July 2025, the first test occurs on 30 June 2026. Your TSB on that date, and each following 30 June, determines if you need to pay additional tax for that financial year. You face a liability if your TSB exceeds $3 million on 30 June.

An Example Explained

Consider Sam. His super balance is $4 million on 30 June. His superannuation grew by $120,000 that year. The portion of his balance above $3 million is $1 million. This represents 25% of his total $4 million fund. His taxable earnings for Division 296 purposes are 25% of the $120,000 growth, which is $30,000. The extra 15% tax on this $30,000 equals $4,500.

Now think about Lisa. Her balance jumps from $2 million to $4.5 million. This increase happens because she receives a death benefit pension. The actual inherited pension amount isn’t taxed as earnings. However, the investment growth on her new, larger $4.5 million balance is included. Because her total balance exceeds $3 million, she could still face a Division 296 tax bill on that growth portion.

Practical Steps to Consider

What actions make sense now? Review your super fund’s liquidity. Plan for potential future tax payments. Make sure your asset valuations are current and documented, especially within an SMSF. Estimate your combined super balances regularly. Plan ahead for any large transactions affecting your balance.

Important Reminder

The legislation is still pending. Parliament might make changes before it passes. Therefore, seeking tailored professional advice early on is important. Do you have questions about super or SMSF? Please reach out to the Bates Cosgrave team for assistance. We are here to help you understand these changes and their impact.