Consider all options and model various strategies in readiness for Div 296: legal expert

Phil Broderick, principal with Sladen Legal, said as yet, there is no official start date to the implementation of the tax, but he believes that it will be applied as originally stated from 1 July 2025.

“Industry representatives are already pushing for a deferral, but our guess is that there will not be a deferral and Div 296 will commence on 1 July 2025 as planned,” he said.

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“That said, affected members should at least consider the potential application of the new measure and what actions, if any, they may wish to take before 30 June 2025 or in the 2025-26 financial year.”

Broderick said if SMSF members do decide to reduce their balance below the $3 million threshold, they have to ensure they have firstly met the conditions of release.

“In many cases, it will be preferable to do this before 30 June 2025 assuming the measure starts on 1 July 2025,” he said.

“This will mean their opening balance at 1 July 2025 will be lower and result in them not being subject to Div 296 or reducing its impact. While the opening balance will still be higher and the closing balance will include the benefits taken out, taking out benefits before 30 June 2026 is likely to reduce the earnings over the year and reduce or eliminate the Div 296 tax.”

He gave an example of Mary, the sole member of her SMSF, who has a super balance of $4 million at 1 July 2025. The SMSF transfers a $1 million commercial property to Mary as an in-specie benefit in September 2025. Her account balance at 30 June 2026 is $3.3 million.

Mary’s opening account balance is $4 million. Her adjusted closing account balance, after adding back the lump sum benefit, is $4.3 million. She will have “earnings” of $300,000 that will be subject to $13,605 of Div 296 tax.

“This is to be contrasted with the situation if she had taken out the commercial property before 1 July 2025, where no Div 296 tax would be triggered,” Broderick said.

“However, the above example could have potentially had a higher tax bill if she had not taken out the property as the tax has not been triggered on any rent or capital growth from September 2025 onwards. In addition, Mary is unlikely to trigger the Div 296 in future years or at least until her account balance reaches $3 million plus again.”

Broderick said there are a number of options available for SMSF members, but emphasised that members should carefully consider each option and model the effects in their particular circumstances.

“For example, an immediate reaction may be to take benefits out of super to avoid the application of the measure. However, modelling may show that this is not the best course of action,” he added.

The first option, Broderick said, is to ensure valuations are accurate before the measure commences.

“As an SMSF may have assets such as real estate and investments in private companies and unit trusts, the value of the assets should be accurately recorded as of 30 June 2025. Any growth of the value of the assets and the member’s benefits are effectively grandfathered from the new regime,” he said.

“The second option is to take benefits out of super which will avoid or reduce the application of Div 296. If they are taken out prior to the introduction of the measure, they will not be caught by the new tax. If they are taken out after its introduction, they will likely reduce the application in that year but will not be caught in future years.”

However, he said this may not necessarily mean the member will be in a better position tax-wise.

“For example, if they invested in individual names, the tax could be up to 47 per cent on income and 23.5 per cent on discounted capital gains. These headline tax rates could be less than the Div 296 tax and SMSF taxes although this depends on the marginal tax rates of the individuals.”

“Likewise, companies attract a 30 per cent tax rate and shareholders can have an effective tax rate of 47 per cent on dividends. However, if the benefits were not invested and were used, for example, for improvements to a main residence, daily expenses or gifts to children, then the member may be better off taking the benefits out of super.”

Another option is taking out assets of super by way of an in-specie transfer of assets, however, Broderick said modelling with this option would need to include the consideration of potential transfer costs versus the cost of Div 296.

“[These transfer costs] include capital gains tax payable by the SMSF, land transfer (stamp) duty for transfers of real estate, and landholder duty for transfers of units or shares in land rich unit trusts or companies,” he said.

“The last option is to do nothing. Modelling may establish, at least in the short or medium term, that the member is still better off keeping their benefits in super even if Div 296 is payable. In this case, the planning is more about ensuring that there is sufficient liquidity to pay the Div 296 tax – either inside or outside of super.”