Super’s new dilemma: save yourself tax or reduce it for your kids?

The most recent change is the Division 296 tax, which levies an additional 15 per cent tax on earnings on your total superannuation balance above $3 million.

This change will cause affected superannuation members to pause and debate whether their balance over $3 million should remain inside superannuation or be withdrawn and invested outside superannuation.

While this change is not legislated to commence until 1 July 2025, affected superannuation members need to give consideration now if they are undertaking or planning to undertake a recontribution strategy between now and July 1, 2025.

This will now potentially require a choice between restructuring your superannuation to reduce the impact of the new Division 296 tax versus restructuring your superannuation to reduce the impact of non-dependents paying tax on monies inherited from your superannuation.

The purpose of withdrawing part of your superannuation and recontributing either into your member account or that of your spouse has essentially been driven by a desire to reduce the taxable member component and increase the tax-free member component.

The benefit of this strategy has been to reduce the impact of any tax paid by non-dependents such as adult children when receiving a death benefit payment comprising a taxable component.

In addition, this strategy has been positioned as a potential way to reduce regulatory risk on the reasonable assumption that governments will continue to tinker with superannuation tax changes in the future. The logic is that any future tax changes would more likely affect taxable components rather than your tax-free component.

The concept of evening up superannuation balances between spouses via recontributions has also been proposed as a way of reducing regulatory risk.

This choice of restructuring your superannuation in an attempt to reduce your tax versus that of your future beneficiaries will become even more important given annual contribution caps, and the relaxing of work tests for non-concessional contributions for anyone under age 75, which has opened up the opportunity to make additional contributions for a lot more people.

If, for example, you are considering a recontribution strategy whereby you use the bring-forward non-concessional cap and add $330,000 of non-concessional contributions to your spouse’s account this financial year, then that will mean any money you withdraw close to July 1, 2025, to reduce the impact of the Division 296 cap won’t be able to be added to your spouse’s member account.

You will now need to carefully plan your annual contribution strategy, particularly given the impact of bring-forward provisions. This is particularly the case given the transition or reworking of your member taxable component towards a higher tax-free component can take a number of financial years to achieve given you are not able to withdraw the taxable component in isolation if your current member balance is a combination of taxable and tax-free components.

The legislation for the new Division 296 tax also doesn’t currently consider indexing the $3 million total superannuation balance threshold, so while your balance might currently be below this threshold, with additional contributions and favourable investment market returns you could find yourself pushing this threshold sooner than you thought.

As superannuation members adjust to more tax changes, a set and forget strategy for your annual contributions is not an advisable approach.

With multiple thresholds, caps and tax rates to consider, you might find that a decision you make this year could impact your ability to adjust your superannuation arrangements as tax changes are implemented in the years ahead.

This article first appeared in the AFR