How are withdrawals treated under Div 296

For a member caught by the new Div 296, “withdrawals” are added back to a member’s end of year balance for the purpose of determining the member’s “earnings”. That is, withdrawals will not directly reduce the members earnings for the year. In contrast, withdrawals are not added back for the proportionate formula, therefore reducing the effective tax rate in the year the withdrawals are made

Withdrawals include a number of things but relevantly include benefits (both lump sums and pension payments) taken out of super during that year.

Importantly, if the member takes out benefits such that they will be below $3 million by the end of the year, that member falls out of the Div 296 regime and the withdrawals will not be added back.

That is, if the member has less then $3 million of benefits by 30 June then no Div 296 tax will be triggered for that year.

Therefore, building on our recent article, members have a number of options when it comes to withdrawals.

Option 1 – withdraw before 30 June 2025

Any benefits withdrawn before 30 June 2025 will not be added back after that date.

However, there is risk with this option. If the law does not pass or is modified or the start date is deferred, the member may not be able to make further contributions leaving the member with less money in super.

Therefore, this option will typically be considered by members who wish to withdraw from super regardless of whether Div 296 comes in or not.

If a member will proceed with option 2, then option 1 may not be needed and the member may feel that they may as well wait and see if the law passes and if so in what form.

Option 2 – withdraw before 30 June 2026 to below $3 million

If a member takes out benefits in the 2025/26 year such that they have less than $3 million at 30 June 2026, no Div 296 will be triggered for the 2025/26 year and any withdrawals will not be added back.

If the member’s balance grows above $3 million by 30 June in a future year, then the Div 296 tax will be triggered in that future year.

Option 3 -– withdraw before 30 June 2026 but still above $3 million

If a member takes out benefits in the 2025/26 year but they have more than $3 million at 30 June 2026, Div 296 will be triggered for the 2025/26 year and any withdrawals will be added back for the purpose of determining the member’s “earnings” (but won’t be added back for the proportionate formula).

This scenario is discussed in our previous article, including our Mary example.

This option may be chosen because the modelling shows that there is still an advantage of holding benefits in super above the $3 million threshold but the member wishes to reduce its impact or withdraw illiquid assets from super or wishes to withdraw benefits for other reasons.

Option 4 – don’t make any withdrawals

For members who can’t yet access their super, this will be their only option.

For members who can access their super, this option may be chosen because the modelling shows that the member is still better off holding benefits in super even with the Div 296 tax.

This may be because the effective tax rate in super (even with Div 296) is lower or it may be because the transaction costs of taking assets out or selling assets outweighs the benefits of avoiding, or limiting the amount of, Div 296 tax.

Modelling is the key

As noted above, members should model the different scenarios before they make a decision as to whether or not to take benefits out of super and the timing of any withdrawals.