There are obviously still some unknowns. Will the Government re-introduce precisely the same legislation that was passed by the House of Representatives in the last Parliament? And will the start date change?
But it does seem one thing is certain – something like Division 296 is back on the table.
So what does that mean for people impacted by it?
First, let’s look at it through the important “don’t panic” lens.
Even if the start date is 1 July 2025, the amount of tax paid will depend much more on how much someone’s super is worth at 30 June 2026 than any other time. That’s because the formula for working it out includes an all important number : the % of a member’s super that is over $3m at the end of the year (30 June 2026 in this case). If that % is zero or close to zero (because only $3m or so remains in super by then), the tax will be $nil or close to $nil.
Secondly, the extensive modelling we’ve carried out already in our practice shows a number of important things.
Up to $3m, super is still the best tax deal in town for those who already have wealth outside super
At the risk of stating the obvious, a retiree with $3m in super is still benefiting from $2m in a tax free retirement phase pension and only 15% tax on the earnings on the remaining $1m. This is hard to replicate anywhere else for people who have assets (and income) outside super.
And these days, many younger people still weighing up whether they should contribute extra to super or save in another tax vehicle will still come to the conclusion that super is a better bet.
In fact, in our modelling we considered what happens to someone in their mid 40s looking to build their super by:
Our calculations suggested that many people in this position would be prevented from building up “too much” in super simply because the limits on concessional contributions are low and the limits on non-concessional contributions stop people making these contributions once they get to $2m (from 30 June 2025) in super.
Even beyond that, while these people might well get to the point where they have more than $3m in super, even modest increases in the cap would take away a lot of the pain of Division 296. While the legislation previously presented to Parliament didn’t include any automatic indexation of the threshold, many other unindexed amounts in tax law are increased every now and again. It seems unreasonable to assume this limit would remain at $3m in 20 or 30 years’ time.
Even up to $3m, those with no other assets should already be thinking carefully about the role super should play in their retirement
Don’t forget that someone with nothing else outside super will find it possible to move a meaningful amount of super money into their own name and yet pay no tax on the income each year thanks to the tax free thresholds, low income tax offsets etc. Where this gets a little murky is if they sell something and generate a large capital gain. Because super operates on a flat rate of no more than 15%, “lumpy” amounts of income like this aren’t a problem. But they are when earned outside super in a personal tax environment that applies higher rates of tax when income is higher.
If moving assets out of super, it matters how they will be taxed when they’re sold
In a lot of our modelling, we looked at moving assets into an individual’s own name or a family trust that could distribute to individuals or a company. Avoiding Division 296 on unrealised gains was extremely beneficial while the asset was growing in value. But often the benefit of avoiding Division 296 tax was completely destroyed when the investment was eventually sold. In other words, people who take large amounts of super out to avoid Division 296 might find they actually end up worse off in the end.
Death taxes are actually the material thing here
One of the good byproducts of all this discussion around Division 296 tax has been the realisation that taking money out of super also means older members are protecting their heirs from being subject to 15% (at least) tax on the “taxable component” of their super. The numbers show that being caught by death benefits tax is actually far worse than Division 296 for most people.
If Division 296 tax is introduced as originally planned by the Government, there will be a lot of thinking to do. We will be running extra education to make sure trustees, advisers and accountants in our network are well equipped for its introduction. We have a dedicated web page that brings together all our resources on this topic here. We’ll highlight new events on that page as and when they are released.