Meg Heffron, director, Heffron, said although the legislation has not included any substantial changes, there were some small amendments that she considers positive.
“For a start, total superannuation balance, which is a critical number for working out who is ‘in’ or ‘out’ of the new tax, has been redefined and simplified slightly,” she said.
“There are two points in this small change that are worth noting.
“Firstly, for this tax only, it won’t include the special amounts some SMSF members with Limited Recourse Borrowing Arrangements (LRBAs) have added back to their total superannuation balance.
“Unfortunately, the government has missed a golden opportunity here to simply remove this ridiculous ‘add back’ from the definition entirely, but at least it won’t be relevant for this tax.
“For those who haven’t come across this before, certain members have their total superannuation balance calculated as the value of their super account plus some or all of the outstanding loan balance.”
The second amendment clarifies that there is no longer a need to calculate the total superannuation balance for any purpose, beyond just taxation, by cross-referencing it with the transfer balance account for pension interests.
“This will have interesting flow-on impacts,” she said.
“We need the regulations to know for sure, but it seems defined benefit pensions will be revalued every year for both this tax and all the other areas in which total superannuation balance is relevant.”
Ms Heffron pointed out another noteworthy change, which is the movement in a member’s total superannuation balance adjusted for net contributions and withdrawals.
“The legislation gave us our first look at what amounts would be included in contributions and withdrawals,” she said.
“They’re sensible changes and some of the issues we were concerned might be missed, were not.
“For example, earnings will be specifically adjusted to reflect the fact that increases in a member’s balance arising from inheriting super pensions, receiving transfers from a partner or ex-partner’s superannuation under a contribution split or family law split, and insurance payouts are not earnings and shouldn’t be subject to the tax.”
She noted that even some amounts allocated from reserves will be excluded from earnings.
The draft exposure has also made similar “sensible” amendments to carve-outs, she said.
“Anyone who has ever received a structured settlement amount that has been contributed to super is just ignored completely,” she said.
“While the large payouts people receive for things like life-changing injuries are already specifically excluded from the transfer balance cap, there was a chance that some could still be caught up in the Division 296 tax if their payouts earned enough over time, or if they added other money to super.
“But it seems the government decided these people have enough to contend with already.
“The government will also not chase deceased members for this tax that would otherwise arise in the year of death. A member who dies before the end of the year will be deemed to have a nil tax regardless of what’s happened to their super during the year.
“Don’t forget, though, that if their balance has been left in super but transferred to a spouse, for example, a reversionary pension or a death benefit pension, it will be counted in the inheriting spouse’s $3 million, so this carve out is only relevant for people whose super is still waiting to be dealt with at the end of the year.”
Earlier this week, the government kicked off a consultation on draft legislation that is set to double the tax rate on earnings from superannuation balances above $3 million.
Under the draft legislation, which was put up for consultation on Tuesday, the tax rate on earnings from total super balances (TSB) above $3 million will double to 30 per cent, while earnings on super balances below $3 million will continue to be taxed at 15 per cent.
“The bills reduce the tax concessions by imposing a tax of 15 per cent on certain earnings based on the percentage of the TSB exceeding the $3 million threshold,” the government said in explanatory materials accompanying the draft legislation.
The changes are set to take effect from the 2025–26 financial year and were originally unveiled by the Treasurer in February before being included in the federal budget in May.
Mark my words – there is nothing good about this new tax.
Best is to understand this new tax with an example: Accumulation Fund
You have $11M and you get say 500K income and $575K unrealized gain = Your “Earnings” for this new tax is $1,075,000 before paying tax on income – for the moment lets ignore contributions and withdrawals. Your TSB at the end of the year $12,075,000
The fund will pay tax on $500K income = $75K Tax
This tax will reduce your adjusted TSB to $1M and your closing TSB is $12M
[b]Earnings[/b] = We have to now work out the propotianate Earnings = Closing TSB – $3M / Closing TSB
$12M – $3M / $12 = 75%
Earnings $1M X 75% = $750K
Effective Tax rate is 75% of 15% Tax = 11.25% (in this case – max 15%)
However it is being charged on unrealized gain as well – hence in this example the Effective tax rate becomes double as the unrealized gain is equal to realized gain.
[b]Div 296 Tax[/b] = $750K x 15% = $112,500
Tax which the member has to pay himself or can withdraw from the fund and pay
Note: This new tax is more than the existing tax as it is being charged on realized and unrealized gain – both
Total Tax $187,500 paid by the fund assuming the member withdraws from super to pay the tax
Earned Income = $500,000
Tax Rate 187,500/500,000 = $37.5%
Individual Tax on 2022- 23
Earned Income $500,000
Tax 195,667 + ML $10,000 = $205,667
Effective Tax Rate: 41.13%
Company Tax Rate = 25%
[b]Example: If un-realized gain is higher[/b]
Same assumptions as above – the asset of the fund is a property Realized income of $100,000 and Un-realized gain is say $515,000
Closing TSB = $11M Opening TSB + $100K Earned Income + $515K Un-realized Gain – 15K Tax on Earned Income= $11,600,000
Propotianate Earnings = 11.6M – 3M / 11.6M = 74.14% x $600,000 = $444,840
Div 296 Tax = $444,480 X 15% = $66,726
Effective Div 296 Tax on Earned income 66.73%
[b]Total Tax $15,000 + $66,726 = $81,726 or 81.73% on Earned income[/b]
Individual Tax rate on $100,000 earned income $24,967 Including Medicare Levy – 24.97%
Capany Tax $25,000
In this situation Trustees will have two choices – Either withdraw excess over $3M or avoid un-realized gain = Fixed Deposit.
SMSF are blamed to have single assets class (limited diversification) and are blamed to hold too much Cash. You will notice that from July 2025 legislation will force Trustees towards holding more cash!
One possible Solution for those who want to maintain effective tax rate of 15%, within super, is to spread their super amoung as many members as possible and keep everyone’s balance below $3M.
This is possible only for members who have reached preservation age and have retired- mostly 60 year olds. The strategy should be to withdraw lump sum and make non-concessional and catch up concessional contributions for kids, son in laws and daugher in laws.
This also means you will be “giving” with a warm hand and not a cold one – and might achive “eternal life” John 17:3