It Depends – Proposed tax on super balances over $3 million or Div 296 tax

In this edition of ‘It depends’, partners Scott Hay-Bartlem and Clinton Jackson talk about the proposed tax on super balances over $3 million, also known as the Div 296 tax. Scott and Clinton have recorded a podcast episode all about this topic – listen now on Spotify, Apple Podcasts, or the CGW website.

Scott and Clinton will be covering this topic in more detail during their session ‘The impact of the $3 million cap (Div 296 tax)’, at our Annual Adviser Conference on 21 and 22 March. Register now to attend live at Sofitel Brisbane or virtually.

It Depends

Welcome to this edition of It depends where we’re talking about the new proposed tax on superannuation balances over $3 million, the Div 296  tax. Now that we have the proposed rules, we can, we’re actually just about to record a podcast called SMSFs with CGW. It’s the first SMSFs with CGW that we’ve done. And it’s on something as important as this. We’re also going to have a session covering this at our Annual Adviser Conference, which is on 21 and 22 March here live in Brisbane at Sofitel and virtually online as well. Now, this is an It depends, it’s meant to be brief. We’re just going to cover off on the highlights, listen for the podcast and come along to Adviser Conference.

Will it apply to me?

And of course, this is our big it depends.

When will it apply from?

The proposed Div 296 tax will apply from 1 July 2025, subject to it getting passed and the result at the next federal election.

To whom do the new rules apply?

So, the new rules apply to members with a total superannuation balance of over $3 million at the end of a financial year. So, that’s all of your superannuation both in pension and accumulation phase across all superannuation funds in Australia.

How is the new tax calculated?

The proposed Div 296 tax will be calculated at 15% on the portion of your earnings above $ 3 million.

What is the proportion?

So, we’re going to pay Div 296 tax on a portion of your earnings. The portion is the percentage of your total superannuation balance at the end of the year, which is over $3 million. So, there’s a formula and the formula is total superannuation balance at the end of the year, minus $3 million, divided by your total superannuation balance at the end of the year. So, if for example, your total superannuation balance at the end of the year is $4.5 million, it’s $4.5 million minus $3 million, which is $1.5 million, divided by the $4.5 million. That gives you a proportion of a third.

What is earnings?

So, the earnings that are going to be used for Div 296 tax is a complete new concept. It’s nothing like that we’ve ever used before in tax law. So, when we’re working this out, we need to think of a whole new set of concepts. So, there is a formula once again for this one as well. And what we’re looking at is our total super balance at the end of the year, minus our total super balance at the start of the year. Now there are some add backs with withdrawals and contributions, which is an interesting area all by itself. But effectively, if we’re looking at it, I guess in broad concept and our total super balance is $4.5 million at the end of the year and our starting balance was $4 million, then our earnings for this purpose is going to be $500,000. So, what we’re capturing here is effectively our unrealised gains on all our assets over the course of the year.

How does this all work together?

So, how does that look when we’re put all that together? The formula is 15% times our proportion, times our earnings. So, looking at a starting total super balance of 4 million at the beginning of the year, finishing total super balance of 4.5, our formula is 15% multiplied by a third, which is the proportion I worked out earlier, multiplied by the $500,000 in earnings that Clinton just worked out. That gives you Div 296tax for that year of $25,000.

Who calculates the new tax and who pays?

Now, the benefit of the Div 296 tax is the ATO is going to calculate it for you. So, you do not it to work this out yourself. You’ll get an assessment and you will then have the choice to pay it personally or take that money out to pay the Div 296 tax from one of your superannuation funds. If you have more than one fund, you’ll have the choice of which fund to take it out from. So, it’s basically modelled very similar to the current Div 296 tax and how you’ll pay it and you’ll receive your assessment. So, that’s the basic way our new proposed Div 296 tax works.

Be aware, it’s not finalised. There’s a whole lot of quirks we’ll will talk about in the future podcasts and future It depends. So, keep an eye out for our podcast. And remember, we’re covering it more at Adviser Conference on 21 and 22 March. Thank you for watching this version of It depends.