Labor’s Proposed $3 Million (Division 296) Super Tax

Note: the transfer balance cap will increase from $1.9m to $2m from 1 July 2025. However, as of the time of publishing, it is currently still $1.9m.

Division 296 tax is a proposed additional tax on the earnings of super funds when a member's balance reaches above $3,000,000.

Currently 80,000 people, or less than 0.5 per cent of individuals will be affected by this additional tax.

To illustrate this tax, we have calculated the tax payable and net investment returns for an individual with a $5,000,000 balance earning an estimated 7% rate of return (5% income and 2% capital growth), for both an individual in accumulation phase and in pension phase (typically after age 60).

		Accumulation	Pension
	Total Balance	$5,000,000	$5,000,000
Tax on the first	$1,900,000	$14,250	$0
Tax on the next	$1,100,000	$8,250	$8,250
Tax on the last	$2,000,000	$36,000	$36,000
	Total Tax	$43,676	$29,426
	Total Returns	$350,000	$350,000
	Net Returns	$306,324	$320,574

Whilst this tax may not initially affect a large proportion of people, it has several fundamental flaws:

1. Tax is paid not only investment income, but also unrealised capital gains.

Firstly, an unrealised capital gain refers to the increase in the value of an asset that has not yet been sold. In other words, it is the paper profit an investor has on an asset due to market value increases, but the gain remains "unrealised" because no transaction has occurred to lock in (or "realise") that profit.

There are few other areas in our tax system where unrealised capital gains are taxed, and this change can present big problems.

Let's say you have an asset in your SMSF where the return comes primarily through capital growth, and produces little income. In this category could be certain investment properties, businesses (particularly start ups) or farm land.

For instance, farm land may appreciate in value, however, it may create little to no income in a year of drought. In the situation, above, this individual may need to pay $58,500 in tax. However, if the farm is the only asset in the SMSF, this person may not have the cash to be able to actually pay the tax. This creates a distressing outcome whereby the individual may be forced to sell their farm, which could have been in the family for generations.

Of course, you could argue that this SMSF should have been more diversified in the first place, particularly as it would need to pay minimum pensions in retirement, however, it is still a highly problematic unintended consequence of this proposed new tax..

It appears that Labor has not considered the impact of these changes for people with illiquid Self Managed Super Funds.

2. The $3m cap is not indexed

This means, the younger you are, the more likely you are to be affected, and pay more tax.

Whilst some commentators have suggested we shouldn't worry about indexation because they can increase the caps later - what is the benefit in waiting? You only have to look at the Division 293 tax to know that when you don't index caps, they become a nightmare due to bracket creep.

The following table shows that for a 30 year old, $3,000,000 will only be worth $1,349,000 when they retire!

Age	Estimated Superannuation Balance at each age *	Yearly salary required to reach the $3m cap based on estimated super balances	What is $3m worth in today’s dollars when you reach age 60
30	$128,000	$148,000 per annum	$1,349,000
40	$453,000	$240,000 per annum	$1,720,000
50	$1,116,000	Not achievable unless the employer pays super above the $240,000 per annum threshold required. This amount would get the total super balance to $2.465m.	$1,933,000 (Present value of $2.465m)

3. People begin to lose trust in Superannuation when the rules change frequently

Financial Planners love superannuation because of the favourable tax treatments.

However, it's time to stop tinkering with it.

It's important people are encouraged to make additional contributions to reduce the reliance on and the cost of the government funded Age Pension.

The system is already fair enough following the introduction of the Transfer Balance Cap limits. If the government wants to look at serious tax reform to reduce the burden on income tax, the government would be much better off turning their attention to an 'estate tax' rather than taxing superannuation further.

If however they persist with this tax, unrealised capital gains must be made exempt.

The reason Labor don't want to do this is because industry super funds (who have strong links to the current government) incur capital gains tax at the fund level rather than individual account level. This means these types of funds are not affected as much as Self Managed Super Fund and wrap platforms, and they don't wish to loose their competitive advantage.

What can you do about the Division 296 Tax?

As soon as these changes were proposed, we began work shopping strategy alternatives for our clients, such as:

• Structuring the superannuation contributions of couples to stay within the $3,000,000 individual caps. By doing so, you can view this as a $6,000,000 cap, rather than a $3,000,000 cap. For example, strategies like contribution splitting and making spouse contributions could prove highly effective to limit disparities between balances for couples. It is imperative that people at risk of breaching the $3,000,000 (i.e. high income earners) reach out for Financial Advice as early as possible as these strategies require time to be able to implement given the different yearly cap restrictions.
  

• Withdrawing funds from pension accounts after preservation age to instead invest within people's personal names. This is particularly relevant because each individual can earn up to $18,200 tax free each year. Then, from $18,201 to $45,000 this next marginal tax bracket is taxed at only 16%.

  
  

• Whether other alternatives such as investment bonds could provide better net after tax returns (beyond the $3m threshold).

If you are concerned about whether you will be affected by the division 296 tax, and you would like a personalised Financial Plan, you can:

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The purpose of this blog is to provide general information only and the contents of this website do not purport to provide personal financial advice.  We strongly recommend that you consult a financial adviser prior to making any investment decision.