The Impacts of Division 296 – Is it coming back?
Following the election result, and the Labor party with potentially more control over the Senate, the proposed Division 296 tax, an additional 15% levy on earnings from superannuation balances exceeding $3 million (not indexed), appears to be on the horizon. This measure, if passed, could significantly impact individuals with substantial superannuation balances and impacts could strike much sooner than previously thought.
Will Division 296 commence on 1 July 2025?
Presently, no official announcements have been made regarding the future of Div 296, including whether the proposed start date of 1 July 2025 will be deferred. Industry representatives are actively advocating for a deferral, but the government’s stance remains unclear.
Given the current political landscape, it is plausible that the tax will commence as planned on 1 July 2025.
Should you act now or wait?
Deciding whether to take actions before the legislation passes is a personal decision that depends on your unique financial circumstances.
However, it is prudent to consider the potential implications of the new measure and evaluate any steps you might want to take before 30 June 2025 or during the 2025/26 financial year. It is better to be prepared for potential action and not follow through, compared with not being prepared at all.
If you have been contemplating actions such as withdrawing funds or restructuring your superannuation, it may be beneficial to seek advice on these plans before 30 June 2025, regardless of whether Div 296 passes, provided they align with your long-term financial goals.
Considering withdrawals – timing matters
If you’re considering withdrawing amounts from your superannuation to mitigate the impact of Div 296, timing is crucial. Assuming the measure starts on 1 July 2025, withdrawing funds before this date could lower your opening balance and potentially exempt you from the tax or reduce its impact.
For instance, if you withdraw assets before 1 July 2025, your superannuation balance at the start of 2025/26 financial year will be lower, possibly keeping it under the $3 million threshold which wouldn’t subject you to Div 296, if it is subsequently passed.
Conversely, withdrawing assets after the tax’s implementation may still reduce the tax’s impact in that year, but the withdrawn amount will be included in your closing balance, affecting future calculations.
For example, imagine you are a sole member of a SMSF which has a balance of $4 million on 1 July 2025. The SMSF distributes a commercial property with a value of $2 million to you as an in-specie benefit (as a member of the fund) in September 2025. The SMSF balance as of 20 June 2026 is $2.3 million. Your opening account balance was $4 million. The adjusted closing balance (after adding back the lump sum benefit) would be $4.3 million. The “earnings” of $300K would be subject to a tax bill of $13,506 under Div 296 (we have not included the exact formula for calculating this amount).
Conversely, if the commercial property were taken out before 1 July 2025, no Div 296 tax would be triggered. However, the above example may be subject to a higher tax bill had you not taken the property out as the tax has not been triggered on any rent or capital growth from September 2025 onwards. Additionally, you would have been unlikely to trigger the Div 296 in the future, unless the account balance was to reach $3 million again.
Furthermore, there would also be legal costs and other expenses incurred by the SMSF if it wishes to make a distribution of property. This offsets the benefit to a minor degree, but it should be part of the member’s consideration.
Exploring your options
Everyone’s situation is unique, and it is essential to consider all available option in light of your personal circumstances.
While some people may opt to act immediately, that action may not be the best option after a more considered view of the issue. Here are some strategies to consider:
Strategy 1 – Ensure accurate valuations
If your superannuation includes assets such as real estate or investments in private entities, ensure these are accurately valued at the commencement of the measure (30 June 2025).
Proper valuations can help in determining the correct tax liability and may influence your decision to retain or withdraw assets.
Strategy 2 – Withdrawal
Withdrawing benefits before the implementation of the new tax can help in reducing your superannuation balance and potentially minimising exposure to the tax.
While withdrawing superannuation benefits might help a member avoid Div 296 and its impacts, this doesn’t necessarily result in a better overall tax outcome. In fact, depending on the investment strategy, the member could face a less favourable tax position. For instance, if the withdrawn funds are invested in personally held assets, income may be taxed at rates up to 47% and discounted capital gains at 23.5%.
These personal tax rates may in some cases exceed the combined impact of Div 296 and SMSF taxation, though this is largely reliant upon on the individual’s marginal tax rate.
Similarly, if investments are made through a company structure, the company’s 30% tax rate applies, and shareholders may ultimately face a 47% effective tax rate on dividends.
On the other hand, if the member uses the withdrawn funds for non-investment purposes such as home improvements, living expenses or gifts to family, they might be financially better off, as these uses don’t attract additional tax.
Withdrawn assets directly
Some members may explore in-specie transfers, such as transferring real estate or shares from the SMSF, as a method of taking their benefits out of super.
In these cases, any financial modelling should weigh the potential costs of transferring the assets against the impact of Div 296. Key considerations include:
Capital gains tax the SMSF may incur upon disposal.
Stamp duty on real property transfers (possible exemptions in Victoria).
Landholder duty for units or shares in land rich entities (also note possible Victorian exemptions).
GST implications.
Practical matters such as lease agreements and tenant negotiations.
Legal and compliance costs, particularly if duty exemptions are pursued.
Future tax implications for holding the asset outside of super.
Costs associated with future transfers to related entities, including duty.
Potential exposure to Victoria’s commercial and industrial property tax regime (if the exemption doesn’t apply).
Land tax outcomes, such as property aggregation or surcharge rates for trusts.
Strategy 3 – Hold
If after careful consideration, you determine that the tax’s implications are manageable, you might choose to maintain your current superannuation strategy. In this case, ensure you have sufficient liquidity to pay the tax, either from within your superannuation fund or externally.
If you have questions or require further information please contact:
Alasdair Woodford
Principal
T: 03 5225 5217 | M: 0436 456 144
E: awoodford@ha.legal
Joseph Flanagan
Senior Associate
T: 03 5226 8504 | M: 0491 307 550
E: jflanagan@ha.legal
Tayla Berger
Senior Associate
T: 03 5226 8559 | M: 0407 825 365
E: tberger@ha.legal
Madeline Thompson
Law Clerk
mthompson@ha.legal
