The proposed Division 296 tax, scheduled to begin on 1 July 2025, will impose an additional 15% tax on superannuation earnings above a $3 million balance threshold. While most people agree on the need for a fair and sustainable super system, this new tax has sparked significant opposition.
Two major concerns driving the backlash are:
- The tax applies to asset growth even if the asset hasn’t been sold
- The $3 million threshold won’t be indexed to inflation
Let’s break down the first issue. Under the new rules, the 15% tax will apply to your super fund’s ‘earnings’ on the portion of your balance exceeding $3 million. You might assume earnings mean actual profits you’ve realised, but that’s not how this tax works. Instead, earnings are calculated based on how much your super balance has grown during the year. This includes ‘paper gains’—increases in asset values that haven’t been sold. The problem? Your assets might rise this year but fall later, meaning you’ve paid tax on unrealised growth without making a profit. In fact, you could even sell the asset at a loss after paying the tax.
Another problem with taxing asset growth before the asset is sold is that you or your fund may not have the cash to pay the tax. In that case it is likely that you will be forced to sell an asset you were not planning to sell just to pay the new tax.
Only ‘earnings’ attributable to assets over $3 million are subject to the additional 15% tax. The threshold might sound high but with inflation the threshold in today’s dollar value will fall. A young person entering the workforce today can expect to pay Division 296 in the future unless this threshold is adjusted for inflation.
Keep in mind that this new tax has not yet been legislated and it may be premature to withdraw money from super to avoid the tax.
If you are concerned about how Division 296 tax may impact your retirement savings give us a call and we can help you understand its implications and explore strategies to optimise your superannuation.