The Federal Government has released the draft legislation for the latest tax on Superannuation funds, with the proposed new 15% tax on superannuation fund members with balances more than $3 million in super. This will be a “Division 296” tax to go along with the Division 293 tax that applies when higher income earners contribute to superannuation.
The draft legislation reflects the original announcement which means that the 15% tax will apply to the “earnings” of the fund, if a member’s balance is in excess of $3m. The main items to note from the draft legislation are as follows:
- The mechanism to determine the earnings of the fund is the movement in a members total superannuation balance. This means that movements in the market value of assets (that are unrealised) will be taxed.
- If the superannuation fund has a bad year and has a negative return, there is no refund of tax.
- Earnings are defined in simple terms to be the movement in a member’s balance adjusted for deposits and withdrawals.
- There is no plan for the $3m ceiling to be subject to indexation meaning that more and more individuals will be subject to this additional tax.
Total superannuation balance
When it comes to total superannuation balance (“TSB”), there are some practical matters meaning the playing field may not be level.
For example, the financial statements can (but often do not) take into account the tax cost of selling assets (the unrealised capital gains tax liability). As such, the accounting for the fund may move members into or out of this tax.
When does the additional tax kick in?
Not all of the earnings are subject to tax. The taxable amount of earnings is determined by reference to the proportion of a member’s TSB over the $3 million threshold using the year end balance.
Like Division 293 tax, the Division 296 tax will be levied on individuals and can be paid from a super fund. Taxpayers will need to review their situation to ensure that they have sufficient liquid assets to pay the tax, which may result in taxpayers needing to refine their investment strategy.
Should you have any questions on how the Division 296 tax may impact you, please reach out to your Engagement Partner.