Super Tax Reform
By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
What you need to know about the proposed new tax on superannuation earnings
Superannuation is the most tax-effective vehicle you can readily invest in. It stands head and shoulders above the next best tax structure, but this is about to change for the wealthy – the playing field is going to be levelled somewhat for those with high superannuation balances.
On 3 October, the Government released draft legislation on the proposal it announced back on 28 February to impose an extra 15 per cent tax on ‘earnings’ on balances greater than $3 million from 2025-26 onwards.
The additional tax will be referred to as Division 296 tax. It does not limit the amount you can have in super but rather limits the tax concessions available on calculated earnings for high balance individuals.
Your total superannuation balance (TSB) forms the basis of the calculation of earnings for the new tax – actual fund earnings are irrelevant. Consequently, unrealised capital gains are captured as earnings and caught in the calculation of tax payable – one of the sore points of this change and a first for the Australian tax system.
Fortunately for people running SMSFs with limited recourse borrowing arrangements (LRBAs), the outstanding loan balance will not be included in their TSB, to ensure the tax is only calculated on net assets. This exclusion is for Division 296 tax purposes only and does not change how LRBAs are dealt with in the TSB for other purposes.
The $3 million threshold is not indexed – there’s no legislative provision for this – so more people will be impacted over time.
Interestingly, it’s called ‘large superannuation balance threshold’ and is used, instead of actually stating $3 million, throughout the draft legislation. So, it wouldn’t take much for a future government wanting to increase it, to simply amend the definition.
Defined benefit schemes will be appropriately valued and have earnings taxed in a similar way to other interests – ensuring commensurate treatment – but this tax may be deferred as members are typically unable to access their super to pay tax debts.
Negative earnings can only be carried-forward to reduce future earnings. There’s no tax refund, another sore point of this tax.
And where a person’s super in a future year drops and remains below $3 million so the tax no longer applies, they may end up having paid tax on a capital gain the fund doesn’t actually realise – and they don’t get their money back.
Children receiving superannuation income streams, people who die during a financial year and anyone who’s had a structured settlement contribution made for them, are excluded from the tax.
Division 296 tax will be levied directly on the individual and they have the option of paying it personally or by releasing amounts from super or a combination of both.
With over one and a half years and an election before it’s due to commence, things can change, but as it stands now, this is how it will work.
Calculating Division 296 tax
Earnings for this tax is the movement in super measured by your TSB over the year, with adjustments.
Accordingly, the first step is to determine the 30 June adjusted TSB to reflect the impact of contributions and withdrawals on the balance.
Net contributions, ‘inherited’ death benefit pensions, transfers from a partner’s super under a contribution split or ex partner’s super under a family law split, insurance proceeds (from a policy held in super), transfers from a foreign fund and certain allocations from fund reserves, are all deducted from TSB to ensure that new money does not inflate earnings.
Similarly, withdrawals are added back to ensure that amounts no longer included in TSB at the end of year are captured.
Next, calculate earnings for the year – positive or negative. If there’s a loss from a prior year (once this is up and running), this will reduce earnings.
Where your TSB in the previous year was less than $3 million but grows to more than this amount, it will be substituted with $3 million to ensure that earnings on amounts less than the threshold are not taxed. Similarly, where the 30 June adjusted TSB is less than $3 million, it will be deemed to be $3 million.
Where earnings are positive, the amount will be used to calculate the Division 296 tax liability for the year. If negative, the amount will be carried forward and used to reduce earnings subject to tax in future years.
Next, calculate the percentage of the TSB exceeding the $3 million threshold (where the end of year TSB is greater than $3 million and there’s positive earnings).
Finally, calculate the tax liability with reference to the percentage of earnings above the threshold and the amount of calculated earnings, and then multiply by 15 per cent.
Take Bob whose TSB grew from $2.9 million on 30 June 2025, to $3.5 million on 30 June 2026.
During 2025-26, Bob withdrew $100,000 and made a $20,000 concessional contribution and $300,000 downsizer contribution.
Bob’s 30 June adjusted TSB is $3,283,000 ($3,500,000 + $100,000 – $17,000 – $300,000).
Bob’s earnings are $283,000 ($3,283,000 – $3,000,000). His TSB at the start of the year is substituted with $3 million to ensure that only earnings over this threshold are taxed.
The percentage of Bob’s TSB exceeding $3 million (which will be the percentage of earnings that are taxable) is 14.29 per cent (($3,500,000 – $3,000,000) / $3,500,000).
So, Bob’s tax bill is $6,066.10 (15% x $283,000 x 14.29%) which he can pay personally or have released from super to pay.
For couples, evening up super balances by cashing out and re contributing, spouse contributions and spouse contribution splitting to maximise the available tax concessions, becomes more important than ever.
Even though super remains extremely worthwhile, you may be contemplating pulling money out to get under the $3 million threshold if you’re impacted by this new tax and have met a condition of release, you could be looking to invest personally or in an alternative investment structure like an investment bond or discretionary (family) trust.
If you choose to take your money out, the question is when should you do it?
Of course, it’s not law yet, but if and when it is, pulling money out from 1 July 2025 will not impact earnings as withdrawals are added back.
But it impacts the percentage of earnings subject to Division 296 tax as this is based on TSB at the end of the financial year. So, where TSB at end of final year is $3 million, the percentage will be nil.
Accordingly, the deadline for making super withdrawals is 30 June 2026, not 30 June 2025.