Linda Bruce, senior technical manager for Colonial First State, said this will affect advisers who are dealing with defined benefit interest, such as defined benefit pensions offered by a public scheme, as well as some non-account-based lifetime or life expectancy pensions, which are typically seen in self-managed super funds.
“It also includes defined benefit interest in a public offer fund in the growth phase,” she said.
“Division 296 tax is designed to capture the super earnings corresponding to an individual’s total super balances over $3 million. The individual’s total super balance plays a key role in determining what Division 296 tax would be.”
“Back in November last year, the government introduced the Bill that will enable the Division 296 tax changes if legislated. Details of how the defined benefit interest should be valued for total super balance purposes was not included. Rather, the Bill, which is at the moment still before the parliament, is actually referring to the regulations, which have just been released.”
Bruce said under the current rules the total super balance for defined benefit of pension is valued as per the special value calculation, which is the link to the transfer balance account.
Using a defined benefit pension from a publicly offered fund as an example, the total super balance value – which is a special value – is calculated by the annual entitlement based on the relevant first payment multiplied by 16.
“That special value will never change under the current rules,” she said.
“The Division 296 tax is calculated based on the differences between the total super balance at the beginning of the financial year and the value at the end of the financial year with certain adjustments involved, and it wouldn’t be equitable if a defined benefit interest stayed static and technically could not be captured by Division 296 tax.”
She added that the bill clarifies how defined benefit interests would be valued for total super balance purposes and is expected to change from year to year.
The different evaluations can apply depending on whether advisers are dealing with a lifetime pension, fixed term pension, fixed term annuity or accruing defined benefit interest.
“The draft regulations say that in many cases the total super balance will be evaluated as per the family law method, which is based on Family Law (Superannuation) Regulation 2001 that contains default evaluation factors and methods of calculation to be used for the full valuations of a super interests, including defined benefit interests, for the purposes of dividing superannuation in family law separation process,” she said.
“In some circumstances, if the fund already has an alternative evaluation method based on the fund’s actuarial valuation, the draft regulations are saying that the fund is able to use the alternative evaluation method, depending on the situation.”
She added the super fund will need to determine which method it wants to use to determine the total super balance value for defined benefit interest and report that value to the ATO.
She also mentioned that once these changes are finalised, they will apply from the 2025–26 financial year for all purposes.
“As we all know, an individual’s total super balance at the previous 30 June can affect many super measures. For example, among other things, it can affect the amount of non-concessional contributions and the ability to use the carry-forward unused concessional contributions,” she said.
These changes are likely to impact advisers’ super strategy recommendations from the 2025–26 financial year.
Once the regulations are finalised, it’s important to confirm with the fund to understand what the client’s defined benefit interest will be on 30 June 2025 and each 30 June after that if advisers are looking at maximising NCCs or CCs contributions strategies for relevant clients.
The Div 296 juggernaut rolls on. This latest iteration is another example of disenfranchising Advisers as it is unlikely they will be able to determine TSB outside of the MyGov/Tax Agent portals. Maybe this new calculation method is better than the simplistic (x16 for example) but, the bill is silent on any potential to change online access levels for financial advisers to the critical thresholds used for much of super advice. It’s tough – appreciate the access to ATO portals is a security nightmare but, it would seem, that providing a person the ability to appoint a “third party authority” to their MyGov record, with read-only access, would solve the head-ache for those that give the advice without having direct access to the key info.
Division 296 was touted as a “low touch” (minimal impact) new tax to create “equity” with an essential feature being “sector neutrality”. This latest iteration just goes to show how, on all measures, this design has failed. It seems the only thing that will matter are the figures in the forward estimates from this year’s Budget of the amazing “tax savings”.
So we have a giant precedent here – the Regulations are being utilised to provide for defined benefit interests (remembering that sector neutrality is a key performance indicator) so, lets now see Regulations being enabled to allow SMSF to self-assess the actual Div 296 earnings from taxable income. Unlike the APRA funds, I doubt practitioners will push back on this “extra work”. I suspect, SMSF clients will gratefully paid additional return prep fees to get a correct figure assessed for the new tax – also remembering that this is not complicated for SMSF accountants, unlike the APRA funds that have a completely different accounting method for their member balances.
So, regrouping on the “sector neutrality” objective – it actually resulted in a design to suit APRA funds as they have the biggest admin head-ache. Defined benefits were/are a real conundrum so were relegated to the Regs. SMSFs are also different to APRA funds with the only aligned feature is that they are, by and large, both defined contribution plans rather than defined benefit. So with the carve out (to Regulations) for defined benefit interests, SMSFs should also have this “fix” applied and then the “sector neutrality” gap is a little less wide. The problem for SMSF isn’t how to calculate the TSB, as it is for the defined benefit interests, it is the calculation of the assessable earnings. So one end of the formula is fraught for the defined benefit interest and the other end (were the rubber hits the road) is fraught for SMSFs. The formula was too simple to ever achieve straight-up “sector neutrality”.