The Institute of Financial Professionals Australia said it maintains its view that Division 296 should not be legislated stating its primary concern is that the measure targets a very small cohort of individuals with unusually large superannuation balances.
However, in its submission to Treasury on the Better Targeted Superannuation Concessions Bill, the IFPA stated that if the government proceeds with the legislation, it urges Treasury to adopt the targeted amendments and clarifications that it believes are necessary to ensure Div 296, if enacted, operates in line with its stated policy intent.
The IFPA stated high super balances are the “exception rather than the norm” and reflect historical superannuation policy settings that permitted higher contribution levels in the past.
“Importantly, the prevalence of such large balances will diminish over time as a result of the contribution caps introduced from 1 July 2017 and the cap on amounts that can be transferred into the tax-free retirement phase,” it stated.
“In addition, large balances are predominantly held by older Australians and given that death benefits must be compulsorily cashed out of the superannuation system, these balances will naturally exit the system over time.”
The submission made recommendations for amendments on total super balance, death-related outcomes, cost base reset and administrative settings as well as non-concessional contributions and net exempt current pension income.
In regard to TSB the submission stated the current proposal which determines whether a member is caught by Div 296 is based on whether the member has a closing or opening balance of $3 million which is a departure from the original measure which only used the closing balance.
“Without modifications, this raises issues of fairness, will have unintended consequences and creates administrative challenges The adoption of a ‘higher of two balances’ approach using the greater of an individual’s TSB immediately before the start of the income year or at the end of the year is said to be an integrity measure perhaps intending to prevent individuals from deliberately withdrawing large amounts from superannuation to avoid Div 296 tax,” it stated.
“A more effective solution is to solely use a modified closing TSB for the purposes of calculating Div 296 tax. These modifications include adding back voluntary withdrawals and subtracting items like insurance proceeds received during the year.”
The IFPA said the unfairness of the proposal is highlighted by individuals who start with a superannuation balance over $3 million but due to a change due to market movements, withdrawals, or other factors outside their control their balance drops (including dropping below $3 million by year end), and who will be unfairly penalised by having their Div 296 liability calculated by reference to a higher opening balance that may no longer reflect their financial position.
“Similarly, contributions and insurance proceeds may also increase the end balance which would be unfair. Taxing notionally high superannuation balances rather than actual superannuation balances is unfair,” it stated.
It recommended that the end-of-year TSB be used and stated this could be a modified TSB similar to the former proposal, for example, with add backs of withdrawals. It also recommended that disability benefits should be permanently excluded from a member’s TSB for Div 296, just like limited recourse borrowing arrangement (LRBA) amounts.
Alternatively, the member should be entirely exempt from Div 296 if a superannuation interest receives TPD proceeds, just like the treatment of a structured settlement payment.
The submission continued that excess non-concessional contributions (NCC) can temporarily inflate a member’s TSB and that the tax consequences of leaving excess NCCs in superannuation are punitive.
“Most members who exceed their NCC cap accept the default option of withdrawing the excess contributions meaning their superannuation balance is temporarily inflated,” it stated.
“Excess NCC amounts left in superannuation are already taxed at 45 per cent and therefore should not be taxed under Div 296. [We recommend] a member’s TSB should be modified to exclude excess NCCs (and associated earnings) to the extent the excess can be released from the superannuation system.”
Additionally, the IFPA submission stated that members should be excluded from a Div 296 liability in the year they died and noted that the former proposed legislation excluded members from the tax in the year they died (unless they died on 30 June).
“This was a sensible approach that should be retained. We note the current draft contains this approach only for the 2026-27 year. While the bill provides that an individual who dies before 30 June 2027 will not be liable for Div 296 tax for the 2026-27 income year, no equivalent exclusion applies in later years,” it stated.
“From 1 July 2027 onwards, deceased members will be captured by Div 296, even where their superannuation has been fully distributed before the assessment is issued. This raises serious practical concerns, particularly where there is no remaining superannuation interest or deceased estate from which to satisfy the tax liability.”
Furthermore, it noted executors may therefore be faced with a tax liability at a point in time when they have no remaining assets under their control. This is compounded by the fact that executors frequently have limited visibility over the deceased member’s superannuation position and potential Div 296 exposure, in contrast to the relative certainty associated with preparing an estate income tax return.
“Death is also a point at which significant capital gains are often realised, potentially inflating Div 296 ‘earnings’ in the final year and exacerbating the unfairness of the outcome,” it stated.
“Finally, the drafting of the death-related exclusion gives rise to significant concern. The distinction based on whether death occurs ‘before 30 June’ rather than ‘on or before 30 June’ appears arbitrary and suggests a possible drafting error, as it creates an unjustifiable differential outcome for deaths occurring on the final day of the income year.”
The IFPA submission continued that the cost base reset and adjustment provisions in the revised draft legislation give rise to significant design and equity concerns.
“While the intent of these measures appears to be to mitigate the impact of Div 296 on unrealised gains, the current framework is overly complex and produces outcomes that are inconsistent with both economic reality and the member-based nature of the tax,” it stated.
“Under the ‘all-or-nothing’ cost base reset election, members cannot discriminate between assets. As a reset may be preferable for some assets and not others, this ‘all-or-nothing’ approach creates inflexibility insofar as members managing their tax affairs.”
It recommends that members should be allowed to reset the cost base on all, some or no assets as applied for the transfer balance cap (TBC) transition back in 2017. Alternatively, it added, the same outcome might be achieved if the reset amount is set at the greater of the asset’s cost base or its market value at the reset date. This would align more closely with the underlying policy intent by preventing double taxation of gains without penalising members if asset values fallen since their acquisition.
Finally, the submission noted that the net exempt current pension income approach to calculating Div 296 appears to limit deductions incorrectly.
“When calculating the net ECPI element of Div 296 fund earnings, only expenses deductible under section 8-1 are ‘added back’. Statutory deductions such as depreciation, capital works and some LRBA borrowing costs are not included in net ECPI,” it stated.
“This means the fund’s net ECPI for Div 296 will be higher than what it should be. [We recommend] that expenses which are also partially deductible under other provisions should also be added back to put the fund in the same position it would have been in had the fund not been entitled to ECPI.”
Furthermore, it stated, adjustments are also required for traditional security losses on segregated pension assets.
“Under ITAA 1936 s.70B(2A)(b) these losses are not deductible but should be ‘added back’ for the purpose of the net ECPI element of Div 296 fund earnings. A modification is also required where a fund has expenses which are fully deductible regardless of ECPI and the fund’s net ECPI calculation would otherwise give a negative result,” it added. “Examples of such expenses would include life insurance premiums, listed investment company deductions, SIS levy, actuarial fees and traditional security losses under ITAA 1936 s.70B(2).”
