5 make-or-break questions for people with $3m in super

When it comes to Division 296 tax, the big question that people with large super balances will be asking is: should I take some money out of super and invest it elsewhere to reduce my balance below $3 million, or leave it in super, grit my teeth and pay the tax bill?

Unfortunately, the answer isn’t obvious and will be highly variable depending on the individual’s circumstances.

But for most of those that will be affected by the new tax, it is likely to hinge on the answers to five key questions.

1. Where would the money go, and how would it be taxed?

Many clients I’ve spoken to mention giving money away to children or grandchildren to get under the threshold. If that’s your plan, read no further. No one pays tax on income from assets they don’t own anymore.

But if someone intends to hang on to the money, a critical consideration will be how future income and capital gains will be taxed.

For example, if you expect you will invest it in your own name, and pay tax at your normal rates, you’d better factor a much higher personal tax bill into your calculation – as much as 45 per cent plus the Medicare levy.

Even if you’re not a top marginal rate taxpayer, moving millions out of super will soon see you pushed into a much higher personal income tax bracket than in the past.

Similarly, if you’re currently benefiting from things such as the Commonwealth Seniors Health Card you may find much more personal income makes you ineligible for it in the future.

Even if you have some fancy tax structures at your disposal (like family trusts or investment companies), remember it’s difficult to invest a lot of money without paying tax of at least 30 per cent unless you can spread it around many people.

For those who use investment companies to house their assets it’s worth remembering that beyond the 30 per cent tax rate (and no Medicare Levy), extra taxes will be paid when the money eventually comes out of the company as a dividend.

Let’s consider, Melanie, a 65-year-old high-income earner with $7 million in super ($2 million in a pension account and $5 million in an accumulation account). She decides to withdraw $4 million to get her super down to $3 million.

For now, we’ll assume she keeps the money and invests it in her own name, where she pays tax at the highest marginal rate.

Regardless of whether the investments are made in her own name or in her super fund, we’ll assume they earn income of 5 per cent per annum and grow at 3 per cent per annum.

Looking ahead to the next financial year, how will all her taxes stack up? 

If we add together all the various taxes she and her fund would pay in the following year, her position is roughly as follows:

Based on these figures and assumptions, leaving the money in super, despite the extra tax, looks better for Melanie.

But if she had less income outside super and wasn’t in the top marginal tax bracket, she’d obviously pay less personal tax.

For example, if she has no income at all, her personal tax bill would only be about $60,000 on the $200,000 now being earned in her own name (5 per cent of $4 million).

Or if she could share this $200,000 income around to other people and end up paying tax at about 30 per cent (plus the Medicare Levy), her personal tax would reduce from $94,000 down to $64,000.

At that point, withdrawing the $4 million and investing it outside super seems a better bet, as the total taxes paid in the first year if she withdrew $4 million would be about $72,975 compared to $84,196 if she left it all in super.

But there’s still something missing.

Over the 12 months, the $4 million Melanie withdrew from her super (the part of her super that’s currently over $3 million) will have grown in value.

And eventually, whatever she bought with the money will be sold. Either she or the super fund will have to pay tax on the capital gain, and it’s likely that the CGT bill will be higher if the money is outside super.

In this example, that extra would be enough to more or less wipe out the benefit she’s had from avoiding Division 296 tax.

Of course, the bad thing about Division 296 tax is that it effectively taxes this growth right now whereas taking the $4 million out of super and investing it personally would mean Melanie only pays tax on any growth when she eventually sells the asset.

That ability to delay tax is good – it means she hangs on to more wealth for longer and keeps getting income and growth on it.

But interestingly, many different models I’ve prepared using different time frames and tax rates all led back to a similar outcome – the high rates of tax paid when the asset is eventually sold claw back most of the benefit someone like Melanie gets from avoiding Division 296 tax.

This is where Melanie’s intentions for the future become critical. If she uses the $4 million to buy something she never expects to sell during her lifetime, she simply won’t care about this extra CGT bill – it will be someone else’s problem. 

2. How would the money be invested?

In the analysis so far, we’ve assumed the $4 million withdrawn from super will earn income but will also grow. And so far, we’ve assumed a pretty high rate of income (5 per cent per annum) and low growth (3 per cent per annum), for a combined 8 per cent.

These assumptions really matter.

As we’ve already said, the great evil of Division 296 tax is that it taxes growth now rather than in the future when the investments are sold.

So people who invest in things that earn very little income but grow a lot are particularly disadvantaged by this tax.

To illustrate, look at what happens if we make different assumptions about Melanie’s situation, such as that the $4 million achieves income of 2 per cent per annum and growth of 6 per cent per annum growth (still a combined 8 per cent).

If we add together all the various taxes over the year using these assumptions instead her position is roughly:

This time it is much more clear-cut – Melanie would definitely consider moving some money out of super.

While modelling over the long term shows she is likely to pay much more capital gains tax when she eventually sells the assets bought with the $4 million she’s moved out of super, it’s hard to voluntarily pay more than $30,000 extra tax each year in the meantime.

I expect many people with low income/high-growth investments will look to transfer them out of super. It’s why farming families and venture capitalists are so aghast at this tax.

3. What are the transaction costs involved in moving money?

In all of these calculations, there has been a glaring oversimplification.

We’ve assumed Melanie can just move $4 million out of super at no cost.

It’s rare that someone like Melanie would just happen to have $4 million in cash ready to be transferred out of super.

Let’s imagine it’s going to cost $50,000 in capital gains tax to sell or transfer enough assets to get $4 million out of Melanie’s super. We’d need to factor that cost in.

In other words, if – for example – making the move is saving her $25,000 a year in Division 296 tax in the short term, it would take her two years to get back to where she started. That might also give her pause for thought.

4. How risky is it to leave the money in super after Labor’s tax comes into effect?

It’s fine to talk dispassionately about higher or lower amounts of tax when everything is predictable.

Whether Melanie’s returns are 5 per cent per annum income and 3 per cent growth or 2 per cent income and 6 per cent growth, we’re still assuming somewhat predictable returns.

But it’s the people who have the potential to earn a big return (or make a big loss) in their super who are rightly most focused on Division 296, and their decision to withdraw the excess over $3 million will be driven by the fact that this is one tax bill that will be impossible to plan for.

They’re right to be worried. In their case, if the assets are invested outside super at least they have some security that they won’t be called upon to fund a tax bill unless something is actually sold.

Imagine having to fund Melanie’s $315,000 Division 296 tax bill if her balance grew from $7 million to $10 million purely due to spectacular growth in a few investments?

5. Who will inherit your super upon your death?

Her death would actually have a far bigger financial impact on Melanie’s family than Division 296 tax.

The very worst thing that could happen is that she died with all her money still in super, it was inherited by her adult financially independent children, and all of it was subject to tax.

In this case the tax rate is 15 per cent so the tax to be paid on the $4 million in “surplus” super we’re debating here would be $600,000.

Plus, there would be tax to pay on the $3 million that’s been left in her super.

Perhaps the silver lining of the Division 296 tax debate is that it is making people with large super balances think seriously about whether they should leave it all in super for the long term.

Historically, people with high super balances have run the gauntlet when it comes to these death taxes for a variety of reasons. 

Some are good – for example, they have a spouse who can inherit their super tax-free so it’s not urgent ... yet.

Some are less good – when the personal tax savings associated with leaving all your money in super is so good it’s hard to make a decision that involves taking money out that may disadvantage yourself but benefit your children.

But this change in the tax environment almost means that those people have the luxury of thinking about their legacy without having to trash their tax situation now, because the government has done the trashing for them.

This article was first published in the Australian Financial Review on 30 May 2025.

For the latest information, news and resources on the Division 296 tax, visit our landing page here.