The Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023 (Draft Bill), together with accompanying explanatory materials, was released by Treasury for public consultation on 3 October 2023. This follows the release by Treasury of a consultation paper, Better Targeted Superannuation Concessions (consultation paper) on 31 March 2023.
The Draft Bill proposes to insert new Division 296 in the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) which will contain the core provisions relating to the new tax. An exposure draft of the Superannuation (Better Targeted Superannuation Concessions) Imposition Bill 2023 (Imposition Bill) was also released, which sets out the proposed provisions that are necessarily required to be contained in a separate bill for constitutional reasons to impose the new tax.
Broadly, from 1 July 2025, new Division 296 tax will apply where a member’s total superannuation balance (TSB) exceeds $3 million and there has been an increase in their TSB at the end of the relevant income year (as adjusted for withdrawals and contributions) compared to their TSB just before the start of that year. This movement in the adjusted TSB is termed ‘superannuation earnings’. The proportion of the superannuation earnings that corresponds with the percentage of an individual’s TSB that exceeds $3 million is termed ‘taxable superannuation earnings’ (TSE). The TSE will be assessed to the individual and subject to tax at the rate of 15%.
This article provides an analysis of several key aspects of the new tax that is proposed to commence on 1 July 2025 and apply from the 2025–26 income year (assessments would commence to be issued after 1 July 2026). For ease of expression, I refer to the term ‘TSB’ throughout this article rather than ‘adjusted TSB (as adjusted for withdrawals and contributions)’.
Key issues with the draft Bill
While broadly supportive of the principle that tax concessions for superannuation should be subject to certain limits, numerous professional bodies have concerns with the following aspects of the new measure:
- The imposition of a tax on unrealised gains — especially as the new tax will adversely impact those with illiquid assets such as real estate that may have no ready funds to pay the tax. SMSFs could easily report actual taxable income on a per-member basis which would overcome this concern.
- Negative superannuation earnings are quarantined — they can only be used to offset future earnings and do not give rise to a refund. If unrealised gains are to be subject to tax, tax symmetry and fairness suggest that a refund should be provided for negative superannuation earnings.
- The $3 million threshold is not indexed — while the new measure is initially expected to impact around 80,000 members in the 2025–26 income year, with increasing investment values and contributions to superannuation over time, it will cover many more.
- A member will have no ability to withdraw their superannuation balance when it exceeds $3 million and they have not yet satisfied a condition of release. The goalposts will change substantially with this new tax and impact taxpayers who are unable to withdraw their super (where their TSB exceeds $3 million) and these people will have no choice but to pay the new tax.
A number of professional and industry bodies continue to advocate for changes to address one or more of the above concerns.
How the new tax will work?
The operation of Division 296 is broadly consistent with the overview provided in the consultation paper. A simplified summary from the exposure draft explanatory materials follows on how the mechanics of the new tax will work.
- An individual has TSE for an income year if their TSB at the end of that year is greater than the ‘large superannuation balance threshold’ (threshold) (defined to be $3 million) and the amount of their superannuation earnings for the year is greater than nil.
- The total amount of TSE for an income year is worked out by first determining the percentage of the TSB at the end of the year that exceeds the threshold according to the following formula:
- The percentage provided by the formula is then multiplied by the amount of superannuation earnings for the year to provide the amount of TSE. This is achieved by applying the following formula:
- The amount of an individual’s basic superannuation earnings for an income year is determined by subtracting their previous balance (their TSB immediately before the start of the income year) from their current adjusted balance (their adjusted TSB at the end of that year), as follows:
- An individual’s adjusted TSB is worked out using the following formula:
- The adjusted TSB reflects a modified closing superannuation balance after considering the effect of a range of withdrawals and a range of contributions that would otherwise overstate or understate earnings. This area is complex given the nature ad number of withdrawals and contributions that may result in an adjusted TSB.
Thus, broadly, earnings are calculated with reference to the difference in the TSB at the start and end of the income year, with adjustments for withdrawals and contributions.
For example, Sarah’s TSB on 30 June 2026 is $6 million. The proportion of her TSB that exceeds $3 million is 50% ([$6 million – $3 million] ÷ $6 million). In this case, 50% of her TSE will attract the additional tax.A flat tax rate of 15% is then applied to the proportion of earnings attributable to an individual’s balance over $3 million.
For example, Sarah’s calculated earnings are $650,000; however, only 50% of these earnings are attributed to her TSB that exceeds $3 million and attract the additional 15% tax.
Sarah’s tax liability is $48,750 (15% × $650,000 × 50%).
Key changes in the Draft Bill (compared to the consultation paper)
- The definition of TSB will undergo substantive changes and require considerably more analysis to determine. The changes to the TSB remove the link to the transfer balance account (TBA) and defined benefit pensions will need to be valued on an annual basis broadly reflective of their withdrawal value. Currently, such pensions reflect their original TBA value.
- A person is not liable to pay Division 296 tax in the following circumstances:
- they are a child recipient of a superannuation income stream at the end of the income year;
- they have (in any year) had a structured settlement contribution made in respect to them as a payment for personal injury regardless of the amount; or
- they die before the last day of the income year.
- Foreign superannuation fund interests have been expressly excluded from an individual’s TSB.
- The Draft Bill confirms that a member’s share of an outstanding borrowing, in relation to a limited recourse borrowing arrangement (LRBA) that is added to a member’s TSB under section 307-230(1)(d) will not be included in their TSB for Division 296 purposes only. This was also noted in the consultation paper.
- Negative superannuation earnings are quarantined and can only be used to offset future positive superannuation earnings.
- A reduced rate of Division 296 general interest charge will apply to any outstanding liabilities relating to Division 296 which remain unpaid by the due date. The reduced rate will be the base interest rate plus 3% (rather than the usual 7%).
The draft Bill makes numerous other consequential and miscellaneous amendments to the ITAA 1997, Taxation Administration Act 1953 (Cth) and other Commonwealth laws to give effect to this measure.
Members are taxed and can elect to obtain a release authority
The new tax will be levied on the member and not on the fund itself. Members will have 84 days to pay their Division 296 tax liability. However, a member will be given the opportunity to withdraw moneys to pay Division 296 tax under a ‘release authority’ arrangement that is similar to what is in place for Division 293 tax. They will have 60 days to elect to release a certain amount from one or more of their superannuation funds for the purposes of paying that tax.
Division 293 tax (an extra 15% tax) is imposed on a member in respect of their concessional contributions where their adjusted taxable income exceeds $250,000 in a financial year (this is a simplification of the Division 293 tax regime which is more complex than this broad summary can explain).
While the ATO will perform the calculations and issue the assessments from its systems and data, advisers will need to understand how the systems and processes work so they can accurately advise their clients on the expected financial impact and Division 296 tax liability. Undoubtedly, there will be errors, issues and teething problems in implementing and refining the systems before the tax is bedded down.
Naturally, the short consultation period (just over two weeks) provides limited opportunity to properly consider and respond to such a substantive new and complex tax that impacts one of Australia’s most important retirement regimes and structures: superannuation funds.
- The new 15% tax on $3M+ member total super balances from 1 July 2025 –– a tax analysis
- NALE changes introduced as Bill on 13 September 2023
- Firms providing discounted SMSF services to staff need an appropriate discount policy ASAP
- Draft legislation issues on proposed NALE changes
- Treasury consultation paper on NALE rules
- NALI Advice
* * *
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 licensed financial adviser under the Corporations Act 2001 (Cth).
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By Daniel Butler ([email protected]) Director, DBA Lawyers
10 October 2023