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.”
Reply to Kim as reply button not working
I think this is correct but I also believe that if the 30 June 26 balance is less than $3m there’s no 296 liability despite the add backs
In response to David (note to the web technicians – the “Reply” option has not worked in some time).
Yes David! I have found the same thing. I learnt so much in all of this about SMSFs, etc. Its a bit like the loyalty of clients though with the banks and utilities – avoiding moving can be costly. Being forced to move, yes in the short term will be costly and time consuming, but overall, much more beneficial long term. I don’t like the juggling act every year and for us our higher earning income is lately also the one with the most capital gains, so we have a bit more nutting out to do initially.
I also love having more control over funds and a lot less red tape.
I was telling everyone not to save in super, but instead, have your own SMSF, save with an eye on the limits and work within those. Lots of limits though and as we have seen here, the govt can move the goal posts at will, and do.
This government is the worst that I have seen in a long time (in my opinion). They are ruining this country and it is rather depressing to sit on the sidelines and watch. Hats off to the likes of the SMSF Advisor who gave this their everything. This seems to have been a war that we were never going to win, not with the lower and upper house setup the way that it is ATM. It must irk the Labor party to have the bedfellows that they have, but they are getting their nasty work done, nonetheless.
I have yet to do the very detailed modeling but my rough analysis indicates that if I keep mainly the higher income earning investments up to 3m in super and withdraw mainly capital appreciation investments over 3m to family trust being careful to net of capital gains and losses then with the stage 3 tax cuts the combined tax in super & personal will be lower after taking action to avoid Div 296 than it is now. If the detailed modeling proves this to be correct what a joke on these alp ratbags that would be.
If the TSB is less than 3M on 30th June 2026, even if due to withdrawals during that financial year, does it still invoke division 296 attention?
I understand that if the balance is more than 3M on that date , then the withdrawal amounts would be added back in for tax calculation reasons.
[quote=Ken Dolbel]What happens if you setup multiple SMSF accounts below the threshold?[/quote]
Your TSB is added from all super interests. It makes no difference how many you have.
What happens if you setup multiple SMSF accounts below the threshold?
The measure starts on 1 July 2025. If a member has a TSB of $3m+ on that date, they are in scope for Div 296. If they withdraw prior to 30 June 2026, the capital value of the withdrawals are added back so the TSB will be increased.
Manipulation of the TSB is not possible as the taxing base is the “adjusted TSB”.