Division 296 tax is set to take effect from 1 July 2025. Under this tax, an additional tax of 15% will apply to investment earnings of a member whose super balance is above $3 million at the end of the financial year. The tax is imposed directly on the individual and is separate from the usual 15% tax payable by the superannuation fund.
Key main points:
- Tax only applies to a proportion of individual’s superannuation earnings, including unrealised capital gains, which are attributed to the amount exceeding $3 million.
- The $3 million total super balance threshold will not be indexed or adjusted for inflation over time. This means as the underlying assets held in the fund grow over time, more members will be caught under this regime.
- New tax will be assessed to the individual exceeding the $3m super balance not the superfund. The individual will have a choice of either paying the tax personally or elect for their superfund to pay.
- There will be no impact on the income tax position of the superannuation fund, nor there will be any impact on franking credits in the fund as the tax is levied on the individual.
- If there are any negative earnings, it will not give rise to a tax refund and loss can be carry forward to reduce the tax liability in the future.
- The ATO will calculate the additional tax once an SMSF has lodged its tax return starting with 2026FY return.
- Account based pension in place will remain tax free within the fund.
How to Calculate this tax:
- Assume Super balance at start of the year : $3.2 million
- Super balance at the end of the year : $3.7 million
- Contributions made to the fund: $100,000
- Pension taken out of the fund: $70,000
First step is to calculate associated net earnings:
Net earnings = Closing balance – opening balance-contributions + withdrawals.
Net earnings = $3,700,000 – $3,200,000 – $100,000 + $70,000 = $470,000
Second step is to calculate earnings portion above $3 million:
Earnings Portion = Excess Balance/Closing Balance x Net Earnings
Excess Balance = $3,700,000 – $3,000,000 = $700,000
Therefore, Earnings Portion = $700,000/$3,700,000 x $470,000 = $88,919
Under the third step, 15% Division 296 tax is applied to the above portion of earnings:
Division 296 Tax = $88,919 x 0.15 = $13,337.85
In the above example, the individual would owe $13,337.85 in Division 296 tax for the year.
Current Position:
Division 296 bill has passed the House of Representatives without amendments, reflecting the Government’s strong push to finalise it. However, the Bill’s progression now depends on Senate approval, where the Government will need support from Greens and crossbench senators to pass it. The bill was scheduled to be debated in the Senate on 4th February but has since been removed from the Senate order of business. We will advise our clients who are impacted by this tax once/if this Bill pass through the Parliament.
