The Division 296 tax measure was a key ‘reform’ platform for the Federal Labor Government. It proposed to apply an additional 15% on the earnings attributable to superannuation balances over $3 million, and was set to take effect for the current financial year.
The proposal was taken to the last Federal election, and with such an overwhelming victory, Labor could perhaps have been justified in claiming a mandate for leaving the policy unchanged. Nevertheless, elements of the measure attracted sharp criticism, not least from within the party itself. These objections have now been addressed…with a slight sting in the tail for some.
Indexed threshold
One major criticism of the proposal was that the $3 million threshold was not going to be indexed. This would effectively result in ‘bracket creep’. One estimate suggested that in its current form, by 2040 $3 million would effectively be $2 million in today’s money. Over time this would mean it would go from being a tax on the so-called ‘super-wealthy’ to one that captures more regular income earners.
It’s now proposed that the $3 million threshold (and the new additional threshold, below) will be indexed to keep pace with inflation and maintain alignment with the Transfer Balance Cap.
Unrealised gains now excluded
Another objection to the proposed measure was the way in which ‘earnings’ were to be calculated. In simple terms (and it’s never actually simple) ‘earnings’ for the purposes of Div 296 tax was defined as closing member balance at the end of the financial year minus opening balance, adjusted for other amounts such as contributions. This would mean that any increase in the value of investments and other assets would also have been subject to the tax. Supposedly this was done to make it easier for larger industry and retail funds to calculate the tax. The result however would have been an unprecedented tax on ‘unrealised’ gains.
The issue was compounded further by the requirement that the member pay the additional tax personally. A member is permitted to withdraw money from the fund to meet the additional tax, but this may not always be possible. What if a significant proportion of the ‘earnings’ for Div 296 purposes was simply gains on investments? If the assets of the fund were reasonably illiquid (say, a farmer who holds the family property in super), there could be less cash in the fund to meet the tax obligation, and the member may have to find the cash to pay the tax themselves.
The amended proposal now removes this additional impost. Div 296 tax will only apply to realised earnings (interest, dividends, gains on actual sales of assets, etc.) and not unrealised gains.
Delayed start date
Due to the delay of the consultation process, the commencement date for the measure has been deferred by a year. This will allow time for superannuation funds to work out how their systems will calculate the appropriate ‘earnings’ figure, and provide room for drafting the amended legislation itself.
The new start date will be 1st July 2026, with the relevant closing super balance date, used to determine applicability, being 30th June 2027.
A new tier for even more Div 296 tax
No doubt to help pay for these concessions, the system will now become a progressive model. Rather than there being simply one threshold of $3 million (now indexed), an additional tier will be introduced, that will be subject to an even higher rate of extra tax.
Earnings on the proportion of superannuation balances over $10 million will now be subject to an extra 10% tax, over and above the 15% extra already proposed.
This now means:
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earnings on the first $3 million in super will be taxed at up to 15% as they have always been;
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earnings on balances between $3 million and $10 million will be taxed at 30%; and
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earnings on balances above $10 million will be taxed at 40%.
Note: Just as with personal marginal income tax rates, the higher rates of tax only apply to the amounts above the thresholds. For example, all superannuation fund members, regardless of their total balance, will only pay up to 15% tax on the earnings attributable to the proportion of their balance that is under $3 million.
With these changes, the Government is hopeful that it can secure the support it needs to get the measure through the Senate and that there will not be any further changes.
