The introduction of Division 296 tax marks a significant change for Australians with substantial superannuation balances. Effective from 1 July 2025, this additional tax applies to earnings on superannuation balances exceeding $3 million. If you are a Self-Managed Super Fund (SMSF) trustee or approaching this threshold, understanding the implications and available strategies is essential.
What Is Division 296 Tax?
Division 296 imposes an additional 15% tax on the proportion of earnings attributable to superannuation balances above $3 million. This is on top of the standard 15% concessional tax rate, meaning affected members could face a 30% tax rate on a portion of their super earnings. Importantly, the tax applies at the member level, meaning SMSFs with multiple members will only have the tax levied on individuals exceeding the threshold, not the fund as a whole.
How the Tax Is Calculated
The tax is calculated based on the growth in your total superannuation balance, including unrealized capital gains. This means even if you have not sold any assets, your fund's increase in value counts toward Division 296 calculations. The formula effectively taxes 15% of earnings attributed to the portion of your balance exceeding $3 million.
For example, if your super balance is $4 million and your earnings for the year are $200,000, approximately $50,000 of those earnings would be subject to the additional 15% tax ($7,500 tax liability).
Who Is Affected?
Division 296 applies to individuals with a Total Superannuation Balance (TSB) exceeding $3 million at the end of a financial year. Given the $3 million threshold is not indexed, more Australians will be caught by this tax over time as their super balances grow. If you are in your 50s or 60s with a healthy super balance, you may reach or exceed the threshold before retirement.
Strategic Planning Options
1. Withdrawal and Recontribution Strategies
If you are eligible to access your super (age 60 or over and retired, or over 65 regardless of work status), consider withdrawing amounts above the $3 million threshold and holding those investments outside superannuation. While you lose the concessional tax environment, the effective tax rate on investment income in personal names may be lower than 30%, particularly if you have low other taxable income.
2. Spouse Contribution Splitting
If your spouse has a lower super balance, you can split up to 85% of your concessional contributions with them each financial year. This helps equalize balances between partners, potentially keeping both under the $3 million threshold. You must apply to split contributions before the end of the following financial year.
3. Recontribution Strategies for Spouses
If you have a significantly higher balance than your spouse, withdrawing funds and having your spouse recontribute them (if eligible) can help balance your superannuation accounts. This requires careful planning to ensure contribution caps are not exceeded.
4. Investment Allocation Outside Super
Consider holding higher growth investments outside superannuation once you approach the threshold. While you lose the 15% tax rate on earnings, you also avoid the additional 15% Division 296 tax on the portion above $3 million. This is particularly relevant for property or growth-oriented shares with significant unrealized gains.
5. Timing of Realizing Capital Gains
Since Division 296 includes unrealized gains, consider the timing of realizing capital gains within your SMSF. If you expect your balance to fluctuate around the $3 million threshold, strategic realization of gains in years when your balance is below the threshold may be advantageous.
Considerations for SMSF Trustees
SMSF trustees should review their investment strategy and consider the implications of Division 296 on asset allocation. The tax may influence decisions about holding property versus shares, the timing of property sales, and whether to retain certain assets inside or outside the superannuation environment.
Seek Professional Advice
Division 296 tax is complex, and the optimal strategy depends on your individual circumstances, age, retirement plans, and overall financial position. Crucially, decisions made today can have long-term implications for your retirement wealth and estate planning.
Concerned about Division 296 tax affecting your SMSF? At Lloyd & Co Accountants in Hawthorn, we provide tailored superannuation advice to Melbourne clients with high super balances. Contact us to discuss your situation and develop a strategy to manage your superannuation tax effectively.
