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When does Division 296 tax ($3M+) make super not worth it?

Short answer

The short answer is that clients should conduct detailed financial modelling and make an objective decision based on the numbers after examining their available options having regard to their particular factual circumstances. Generally, clients should not act hastily and should be better positioned to make a more informed decision closer to 30 June 2026 as outlined below.

Introduction

From 1 July 2025 a new additional tax will apply to those who have a total superannuation balance (TSB) of greater than $3 million. Consequently, we often receive the question: Should a client not have more than $3 million in superannuation?

Naturally, it is not a ‘one size fits all’ answer. Rather, it depends on many factors and assumptions. We feel it is best approached by detailed financial modelling of various scenarios. Naturally, accountants and actuaries are best qualified to perform financial modelling. As a law firm, we are asked at times to prepare some financial modelling to illustrate the superannuation, tax and legal advice we provide. Accordingly, clients are generally well served by:

  • Making assumptions addressing various factors (see the discussion below under the heading ‘Factors to consider’).
  • Their adviser (eg, accountant or actuary) completing several different spreadsheet models of different scenarios. Such scenarios might include:
    • Scenario 1: asset bought and then sold outside of SMSF if marginal tax rate (MTR) outside SMSF is 47%
    • Scenario 1A: asset bought and then sold outside of SMSF if no other income outside SMSF
    • Scenario 2: SMSF (100% accumulation mode)
    • Scenario 3: asset bought and then sold inside of SMSF (maximum transfer balance cap amount in pension mode and balance in accumulation)
  • Deferring any immediate action to see how things unfold and re-assessing their options closer to 30 June 2026 (discussed under the next heading).

Why you can wait until 30 June 2026

Some people think that re-structuring needs to take place before 1 July 2025, that is, when the new tax takes effect. However, this is not necessarily correct. Rather, often the more relevant date is 30 June 2026.

Division 296 tax is only payable if (among other things) ‘your [TSB] at the end of the year is greater than the large superannuation balance threshold [ie, $ 3 million]’ (proposed new s 296‑35(1)(a) of the Income Tax Assessment Act 1997 (Cth) (ITAA)).

Therefore, if someone had say $4 million in an SMSF during most of FY2026, but on 15 June 2026 withdrew $1 million, that person would probably have no Division 296 tax.

Some people disagree with this statement because they think that withdrawals are added back. While there is provision for add-backs of withdrawals in respect of calculating ‘superannuation earnings’ (proposed new s 296‑40(2) of the ITAA), this does not apply to s 296‑35(1)(a). This means that someone with a TSB of no more than $3 million as at the end of the relevant year does not pay Division 296 tax.

Thus, advising clients to withdraw prior to 1 July 2025 to minimise Division 296 tax may result in lost opportunities and potential complaints.

Naturally, there may still be reasons for clients to withdraw prior to 1 July 2025 or prior to 30 June. For example, clients may seek to reduce the impact of Division 296 by making a withdrawal that does not cause their TSB to fall below the $3 million threshold.

Factors to consider

Advisers and clients can work on financial modelling to see if maintaining a superannuation balance above $3 million beyond the 2025-26 financial year makes sense. Naturally, this involves establishing a model with various assumptions and factors to consider including:

Factor 1: What tax rates will apply in the superannuation environment? Naturally, a complying superannuation fund typically pays:

  • 15% on ‘regular’ income;
  • 10% on ‘discount’ capital gains (assuming a 1/3rd capital gains tax discount – CGT – applies); and
  • 0% on assets supporting pensions.

However, the above is of course an oversimplification. For example, a 45% tax rate applies if there is non-arm’s length income.

Factor 2: What tax rates (including the Medicare levy) will be applicable outside of superannuation (noting that personal MTRs change from 1 July 2024)?

Factor 3: How long might the asset be held for? Remember that if a taxpayer that is not a complying superannuation entity purchases an asset with the purpose of re-sale at a profit, the asset’s disposal may be taxed as ordinary income, and not on capital account. Therefore there may be no CGT discount available.

Factor 4: How much of the asset’s return will be capital appreciation and how much will be ordinary income?

Factor 5: Are there any other taxes to consider, in addition to income tax and Division 296 tax?

A worked example

In one model we prepared for a recent webinar on Division 296 we considered various scenarios where a client was considering purchasing a $5 million asset. Our assumptions included the following:

  • asset produces income per annum of 3%
  • asset unrealised increase in value per annum of 7%
  • asset is owned for 10 years and then sold and that is taxed under the CGT regime (which, might not be the correct assumption outside of the SMSF regime)

Naturally, we had to make many other assumptions as well to prepare a model.

A summary of the modelling is as follows:

Summary of some basic modelling Total tax  

$

Tax rate

%

Scenario 1: asset bought and then sold outside of SMSF if marginal tax rate (MTR) outside SMSF is 47% 2,100,000 31
Scenario 1A: asset bought and then sold outside of SMSF if no other income outside SMSF 1,800,000 26
Scenario 2: SMSF (100% accumulation mode) 1,400,000 20
Scenario 3: asset bought and then sold inside of SMSF (maximum in pension mode and balance in accumulation) 1,100,000 16
Notes:

  • The figures in the total tax column are rounded to nearest $100,000. Total tax = income tax + div 296 tax
  • The figures in the effective tax rates in the tax rate column are rounded to nearest %

 

Note that, as a law firm, we do not provide financial product advice and the above modelling should not be relied on as it’s just to provide an example.

Also, note that there is no ‘one size fits all’ answer. However, the above example illustrates that based on the assumptions in the above model, super might still be more tax effective than certain alternative options despite Division 296 tax.

Remember this is now law yet

Remember that Division 296 tax is not law yet and could change before being finalised. In particular, there are numerous organisations still requesting changes, including that:

  • unrealised gains should not be counted as taxable superannuation earnings;
  • if unrealised gains are taxed, that a loss carry back or refund system should apply as the proposed carry forward loss approach will result in tax being paid on unrealised gains that may result in a loss; and
  • the $3 million threshold should be indexed.

Division 296 is still just a proposed law in a Bill, namely, the Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023 (Cth). To track the passage of this Bill through Parliament, visit: https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r7133

Conclusions

Superannuation may still be viable beyond a $3 million balance and it is worthwhile to do some financial analysis and obtain appropriate advice where needed.

Naturally, we would be pleased to assist.

Related information

For related information and articles:

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).

Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.

For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.

By Fraser Stead (fstead@dbalawyers,com.au) Lawyer, Bryce Figot ([email protected]) Special Counsel and Daniel Butler ([email protected]) Director, DBA Lawyers

DBA LAWYERS

6 May 2024