New $3m Superannuation tax introduced to Parliament

Superannuation & Self-Managed Super Funds

12-12-2023

New $3m Superannuation tax introduced to Parliament

On 30 November 2023 the government tabled legislation to modify the existing superannuation tax concessions through a measure called Better Targeted Superannuation Concessions. This initiative, part of the federal budget, intends to limit tax concessions for individuals by introducing an extra 15% tax on superannuation earnings over $3 million (known as Division 296 tax) starting 1 July 2025.

The new legislation is estimated to increase receipts by $950 million and increase payments by $47.6 million over the 5 years from 2022-23. In 2027–28, the first full year of receipts collection, the measure is expected to increase receipts by $2.3 billion.

Understanding Division 296

Unlike like most taxes imposed on citizens the Div 296 tax is the first legislation to tax unrealised gains. The process of calculating Division 296 tax involves several steps for those with a total superannuation balance (TSB) over $3 million, summarised as follows:

Step 1: Determine the percentage of earnings attributable to the portion of the individual’s TSB exceeding $3 million.

This is based on the difference between the TSB at the end of the income year and the proposed $3m threshold. If the TSB on 30 June each year is less than $3m the member will not be subject to Division 296 tax for that income year.

Step 2: Calculate the individual’s adjusted TSB.

The adjusted TSB is calculated by adding certain withdrawals and subtracting the contributions for the year from the TSB at year end. The purpose of this step is to ensure that the TSB used in the calculation of Division 296 tax reflects only the change in the value of the member’s balance from the start to the end of an income year.

Withdrawals are added back to prevent taxpayers from taking money out of their superannuation account to avoid a division 296 tax liability. Contributions are excluded from the calculation as they do not represent the fund’s earnings but rather an injection of capital.

There are proposed exclusions to the withdrawals and contributions components, and advisers should consult the final legislation once enacted to ensure these components are correctly treated.

Step 3: Calculate the amount of the basic superannuation earnings (BSE) used to determine the Division 296 tax liability.

The BSE is calculated by subtracting the TSB at the end of the previous income year from the adjusted TSB calculated in Step 2 above. If an individual has “unapplied transferrable negative earnings” (where the BSE is less than nil in a previous income year), these losses can be carried forward to reduce the BSE in a later income year.

Step 4: Calculate the taxable superannuation earnings (TSE), which is the proportion of the BSE that will be subject to Division 296 tax.

The TSE is calculated by multiplying the BSE (less any unapplied transferrable negative earnings), as calculated in Step 3, by the percentage calculated in Step 1 above. This step is important as it limits the operation of Division 296 to the proportion of the earnings attributable to the amount of the superannuant’s balance that is above $3 million.

Step 5: Calculate the amount of Division 296 tax.

This is the final step and is calculated by multiplying the amount in Step 4 by the proposed tax rate of 15 per cent.

For individuals with defined benefit interests (including Commonwealth and territory judges) and superannuation contributions to constitutionally protected funds, specific rules will be in place to determine the amount of Division 296 tax.

Included in the legislation were a couple of worked examples to help explain the operations of this new tax.

Example 1.2 – Jess

FACTS:

Member – Jess

Super Balance as at 30 June 2025 $4m

Super Balance as at 30 June 2026 $4.5

Concessional contributions FY26 $27,500

Non-Concessional contributions FY26 Nil

Withdraws FY26 Nil

Step 1: Does Div296 tax apply?

Jess has a TSB of $4.5 million on 30 June 2026 exceeding the $3m threshold so Div 296 applies

Step 2: Calculate the adjusted TSB

The tax affected contributions are deducted from the closing balance:

$4.5m – (1-15%)*$27,500 = $4,476,625

Step 3: Calculate the Basic Superannuation Earnings (BSE)

$4,476,625 - $4,000,000 = $476,625

Step 4: Calculate the Taxable Superannuation Earnings (TSE)

Note there are no unapplied transferrable negative earnings as this is the first year of the tax

The Taxable superannuation earnings is $476,625

Step 5: Calculate the Div 296 Tax

This is the proportion of TSE above $3m is ($4.5m-$3m)/ $4.5m = 33.33% (note 2 decimal places used, also the TSB is used not the adjusted TSB)

The taxable earnings is 33.33% x $476,625 = $158.859.11

The Div 296 tax is $158,859.11 x 15% = $23,828.85

Our thoughts:

The Albanese government is hell bent on proceeding with this new tax despite several structural weaknesses with the new tax. Namely:

  • The tax is unlikely to be incurred every year if at all. The tax is based on taxable earnings due to the growth of the member’s account. If the member’s account reduced due to negative investment returns, no tax will be payable. Recent modelling from the ANZCA indicates that if the tax was introduced 20 years ago, tax would be payable in only 7 of these 20 years due to fluctuating returns.
  • You could reduce the tax to nil if your TSB is less that $3m at 30 June 2026. Take Jess’s example above. If Jess met a condition of release and withdrew $1.5m on 29 June 2026. The taxable superannuation earnings will still be $476k but the tax is only applied on the proportion above $3m. If this is nil, then the tax is nil. Note any new contributions will be subject to contribution limits.
  • If you die on any other day than 30 June you will not be subject to the tax, if you die on 30 June and your TSB is over $3m, you may be subject to the tax.
  • It taxes unrealised capital gains earned prior to 1 July 2025. So if you were a keen investor and saver and have accrued significant unrealised gains prior to 1 July 2025 they will be included in the calculation of the taxable earnings for the Div296 tax.
  • The threshold is not indexed. The Government has estimated that approximately 80,000 people or approximately 0.5% of Australians with a superannuation account in the 2025-2026 income year. Shadow treasurer warned the tax will impact significantly more Australians than 80,000 as its not indexed. Early opposition modelling suggests the new tax will impact 10 % of Australian superannuation account holders within 30 years.

This information is general in nature and is provided by Partners Wealth Group. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.