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When does the Division 296 make super not worth it?

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By Keeli Cambourne
May 15 2024
3 minute read
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Superannuation may still be viable beyond a $3 million balance but doing some financial analysis and seeking appropriate advice is key, a professional has said.

Fraser Stead, solicitor with DBA Lawyers, said before making any decisions regarding the Division 296 tax, SMSF members should conduct detailed financial modelling to make an objective, numbers-based decision.

“SMSF members should not act hastily and should be better positioned to make a more informed decision closer to 30 June 2026,” Stead said.

“Naturally, it is not a ‘one size fits all’ answer. Rather, it depends on many factors and assumptions that are best approached by detailed financial modelling of various scenarios. Accountants and actuaries are best qualified to perform this.”

Stead said there are several different scenarios, including:

Scenario 1: Asset bought and then sold outside of SMSF if marginal tax rate (MTR) outside SMSF is 47 per cent.

Scenario 1A: Asset bought and then sold outside of SMSF if no other income outside SMSF.

Scenario 2: SMSF (100 per cent accumulation mode).

Scenario 3: Asset bought and then sold inside of SMSF (maximum transfer balance cap amount in pension mode and balance in accumulation).

“Some people think that restructuring needs to take place before 1 July 2025, that is, when the new tax takes effect. However, this is not necessarily correct. Rather, often the more relevant date is 30 June 2026,” Stead said.

“Division 296 tax is only payable if your TSB at the end of the year is greater than the large superannuation balance threshold of $3 million, therefore, if someone had $4 million in an SMSF during most of FY2026, but on 15 June 2026 withdrew $1 million, that person would probably have no Division 296 tax.”

Although some people may disagree with this statement because they think that withdrawals are added back, Stead explained while there is provision for add-backs of withdrawals in respect of calculating ‘superannuation earnings’ (proposed new s 296‑40(2) of the ITAA), this does not apply to s 296‑35(1)(a).

“This means that someone with a TSB of no more than $3 million as at the end of the relevant year does not pay Div 296 tax, thus advising clients to withdraw prior to 1 July 2025 to minimise Div 296 tax may result in lost opportunities and potential complaints,” he said.

“There may still be reasons for clients to withdraw prior to 1 July 2025 or prior to 30 June. For example, clients may seek to reduce the impact of Div 296 by making a withdrawal that does not cause their TSB to fall below the $3 million threshold.”

He added that advisers and clients can work on financial modelling to see if maintaining a balance above $3 million beyond FY2026 makes sense.

This process, he said, involves establishing a model with various assumptions and factors, some of which may consider the tax rates that will apply in the superannuation environment.

“Naturally, a complying superannuation fund typically pays 15 per cent on ‘regular’ income; 10 per cent on ‘discount’ capital gains (assuming a 1/3rd capital gains tax discount – CGT – applies); and 0 per cent on assets supporting pensions.

“However, the above is of course an oversimplification. For example, a 45 per cent tax rate applies if there is non-arm’s length income.”

Factor 2, according to Stead, includes what tax rates (including the Medicare levy) will be applicable outside of superannuation (noting that personal MTRs change from 1 July 2024), while factor 3 relates to how long the assets are held.

“Remember that if a taxpayer that is not a complying superannuation entity purchases an asset with the purpose of resale at a profit, the asset’s disposal may be taxed as ordinary income, and not on capital account. Therefore there may be no CGT discount available,” Stead said.

Factor 4 includes how much of the asset’s return will be capital appreciation and how much will be ordinary income, while factor 5 considers whether there are any other taxes to consider, in addition to income tax and Division 296 tax.

Ultimately, Stead said, the Division 296 tax is not law yet and could change before being finalised.

In particular, he said, there are numerous organisations still requesting changes, including that: unrealised gains should not be counted as taxable superannuation earnings; if unrealised gains are taxed; that a loss carry back or refund system should apply as the proposed carry forward loss approach will result in tax being paid on unrealised gains that may result in a loss, and the $3 million threshold should be indexed.

“Superannuation may still be viable beyond a $3 million balance and it is worthwhile to do some financial analysis and obtain appropriate advice where needed.”

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