The Australian Government’s proposed Division 296 legislation, expected to begin on 1 July 2025, introduces a new 15% tax on earnings linked to the portion of an individual’s Total Superannuation Balance (TSB) exceeding $3 million. Aimed at reducing tax concessions for wealthier Australians, the measure has raised concerns due to its complexity and potential unintended consequences.
What’s Proposed?
Division 296 is a personal-level tax, separate from existing superannuation taxes. Key features include:
- A 15% tax on earnings above the $3 million threshold.
- Applies to unrealised gains, meaning tax may be payable on asset value increases even if not sold.
- The $3 million cap is not indexed, so more people will be affected over time.
- No refunds for negative returns—losses can only be carried forward.
- Applies regardless of residency.
Based on the previous bills presented, the Division 296 tax will be implemented for the 2025/2026 financial year. This means that while the start date of the tax will be 1 July 2025, the first date that individual member balances over $3 million will be taxed is 30 June 2026. If a member’s balance is over $3 million on 1 July 2025, but under $3 million on 30 June 2026, they will not be subject to Division 296 tax.
Why It’s Prudent to Wait
Despite the urgency some may feel, there are compelling reasons to hold off on making major changes to your superannuation strategy until Division 296 is legislated:
- Legislative Uncertainty
The legislation is still in draft form. Final details—including exemptions, transitional rules, and calculation methods—may change. Acting now could lead to irreversible decisions based on assumptions that don’t hold.
- Risk of Overreaction
Withdrawing funds prematurely to reduce your TSB below $3 million could:
- Trigger capital gains tax or other personal tax liabilities.
- Result in loss of concessional tax treatment on future earnings.
- Reduce your retirement savings, potentially impacting long-term financial security.
- Strategic Planning Requires Clarity
Once the legislation is finalized, individuals and advisers will have a clear framework to make informed decisions. This includes modelling tax impacts, exploring alternative structures, and timing withdrawals or contributions effectively.
Risks of Moving Money Out of Super Too Early
While it may seem logical to reduce your super balance now, doing so without full legislative clarity carries several risks:
- Tax Inefficiency: Superannuation earnings are taxed at concessional rates. Moving funds to personal or trust structures may result in higher tax liabilities.
- Liquidity Challenges: Selling assets to fund withdrawals could be costly, especially for SMSFs holding property or unlisted investments.
- Missed Growth Opportunities: Superannuation remains one of the most tax-effective vehicles for long-term investment. Premature withdrawals could limit future compounding.
- Complex Compliance: SMSFs may face valuation and reporting challenges if assets are sold or restructured hastily.
Conclusion
Division 296 represents a major change in how superannuation is taxed for high-balance individuals. While the Government has indicated its intent is to create a fairer system, the inclusion of unrealised gains, lack of indexation, and personal-level tax assessments introduce complexity and risk.
For now, the best approach, is to stay informed, and wait until the legislation is enacted. This ensures that any strategic changes are based on certainty, not speculation—protecting both your wealth and your peace of mind. That being said, it would be prudent to engage with clients that could be impacted, ensuring that they are informed and engaged and understand that once there is more certainty we will be able to provide them with professional advice.
