Hold off implementing major changes until final bill is passed, experts warn

With the legislation more than likely to be passed following the weekend’s election, which saw the government returned in majority, leading voices within the industry are urging SMSF trustees not to rush to make substantial changes too quickly.

David Busoli, principal for SMSF Alliance, said following Saturday’s election, the Labor government has won control of the House of Representatives, and the Senate will also be controlled by the government with the help of the Greens.

X

Continue to Website

“It is inevitable that Div 296 will be reintroduced and passed. Notably the Prime Minister reiterated, last week, that the cap will not be reduced to $2 million as demanded by the Greens. Presumably the new tax will become effective from 1 July 2025, even if the legislation is not passed by then,” Busoli said.

“Given the proximity to the end of the financial year, you will need to deal with concerned clients wondering how this will affect them and if they need to take some action before the end of the financial year.”

However, Busoli said he would expect that, for most affected members, remaining in super will continue to be the best option, however, any analysis must be “bespoke” and might take time to prepare, so it will be difficult to produce and practically implement before 30 June.

“In any case it is possible, though unlikely, that the legislation will differ from what was originally introduced. Fortunately, the matter isn’t as urgent as it seems,” he said.

“The tax is based on the member’s year-end balance so, as the first year of operation will be the 2025-2026 year, it is the member’s adjusted total super balance on 30 June 2026 (not 2025) that is relevant.

“An individual with more than $3 million in superannuation at the start of, or during 2025-26, who reduces their balance to $3 million by 30 June 2026 will not be impacted by the tax. This means that action to equalise member balances might be considered before the end of this financial year, given contribution eligibility considerations, but probably little else.”

Anthony Cullen, senior SMSF educator for Accurium, said although the tax is likely to be implemented, it is still uncertain what the final legislation will look like.

“Is it going to be what was presented to the last Parliament? Is it going to be changed? The government is going to be relying on the Greens and they proposed four changes previously, including lowering the threshold to $2 million and removing the limited recourse borrowing arrangement option for SMSFs,” he said.

“It’s now a matter of a lot of horse-trading before it gets across the line and whether the Greens will exempt it in its current form. That’s probably the great unknown.”

Cullen added that the government may not change anything, and said if that is the case, those affected have had enough time to prepare for it already.

“But if it changes, for example if the threshold drops to $2 million, then that’s a new cohort of people that are being affected and you could potentially argue there hasn’t been enough time for people to adjust and prepare for it, because previously these people were not captured by [the tax],” he said.

“I think we have got to go back to what was the common theme that was coming out of the previous iteration of the bill. Most of the industry said not to act too quickly. Start preparing for it, but don’t jump the gun, and even though we potentially only have a couple of months before this is a new reality, there’s still that element of pulling the trigger a little bit too soon.”

He added that the underlying message was that there was nothing wrong with preparing for the passing of the legislation, but don’t action plans before the final bill is completed.

Meg Heffron, director of Heffron, said for those looking to avoid the tax altogether by making sure their super is below $3 million, it’s important to remember that even a 1 July 2025 start date doesn’t require it to be down to that level before 1 July 2025.

“It simply means their super needs to be below $3 million before 30 June 2026. I am desperately hoping they will at least defer the start date as there will be a lot of large super funds who can’t do the relevant reporting in 2025-26, starting with new methods for calculating total super balance at 30 June 2025 for some funds,” Heffron said.

Aaron Dunn, chief executive of Smarter SMSF, said SMSF trustees and members shouldn’t “pull the trigger” on anything until there was law in place.

“It could be a brand-new bill,” he said.

“I wouldn’t be pulling the trigger on anything until we’ve got more on it, or at least we’re starting to see what’s transpiring with it, because they could decide to make amendments to the bill.

“I think most advisers would be making their clients aware of the realities of it based upon the way in which government has been reformed in both the lower and upper houses and Labor’s view that they were going to be reintroducing this. You should be prepared for it, but I wouldn’t be taking any action until we have some more concrete information around how it would ultimately operate.”

Nicholas Ali, head of technical services for Neo Super, said with the election decisively won by the Albanese government, the SMSF industry was looking on with some angst.

“Even though a greater number of prominent Australians are voicing their concerns with this unprecedented tax on superannuation, Labor seems hell bent on reintroducing this measure,” he said.

“In the previous Parliament, it was defeated in the Senate, but this time around Labor looks like extending their numbers in the upper house and only require the support of the Greens to pass their legislation, who want the threshold dramatically reduced to $2 million.”

He added only “time will tell” if the government agreed to reducing the threshold to ensure the legislation is passed, and whether it would “embolden” the government to look at taxing unrealised gains in other asset classes.

“One thing Div 296 tax did highlight is there is potentially a greater elephant in the room, one that has been around since the Howard government introduced the Simpler Super measures that imposed a death tax by stealth way back on 1 July 2007,” Ali said.

“And that is superannuation death benefits tax. Many Australians will not pay Div 296 tax, although without indexation this cohort will grow rapidly. However, almost every adult recipient of a superannuation death benefit from their parents that has a taxable component will pay death benefits tax. The quantum of this tax almost always dwarfs Div 296.”

Ali gave an example of Gary, who has $1.2 million in super, $800,000 taxable component and $400,000 tax-free component.

“He will probably never pay Div 296 tax. However, if Gary dies and leaves his super to his two adult children, Wendy and Dwayne, $136,000 in lump sum tax will be withheld from the superannuation benefit, with only $1,064,000 paid to his next of kin,” he said.

“In some ways, Div 296 tax has provided a wake-up call. Considering this poorly designed tax.”

He added that all Australians should look to do the following:

· Undertake a recontribution strategy to withdraw the taxable component tax-free and then re-contribute the money back to super as a non-concessional contribution.

· This recontribution should potentially go to a spouse with a lower account balance, so both members ultimately have similar amounts in super.

· Withdraw amounts above the Div 296 tax from the super system altogether to avoid both this and the lump sum death tax.

· Gift super pre-death to children or grandchildren, and enjoy the fact that the government will get no tax from it.

· Withdraw money from super and examine other investment vehicles, or even invest money in individual names, to maximise the personal tax-free thresholds.

“As a resilient citizenry who detest unfairness, Australians will not sit still and cop this gross tax,” he said.

“There are plenty of ways to defeat this tax. It is incumbent on Australians to seek advice and be proactive with their overall wealth wallet to ensure the government gets as little as possible, and those they consider near and dear to their hearts get as much as possible.”