Division 296 tax legislation aims to reduce the tax concessions available to individuals with substantial superannuation savings – specifically, those with a Total Superannuation Balance (TSB) exceeding $3 million.
Once the Division 296 tax is in effect, from 1 July 2025, a new additional tax will apply to those who have a TSB of greater than $3 million. Any earnings on superannuation balances exceeding $3 million in a financial year (including unrealised capital gains) will be subject to an additional 15% tax, making the total tax on this portion of earnings 30%.
The tax will be levied directly on individuals and imposed separately to personal income tax and superannuation fund tax (like the current Division 293 contribution tax, the individual may elect to pay this tax personally, or elect to pay the tax from their superannuation account balances). The $3 million cap will not be indexed.
The much-debated tax on superannuation balances over $3 million is inching closer and for clients who may be affected we should ensure they have considered the implications when it comes to their investment strategy and the impact on their estate planning.
Why you Need to Review your Investment Structures
Taxing unrealised gains contained within the legislation is a tax on market movements and changes in asset values, not income, setting an alarming precedent as it represents a fundamental change in how tax policy is implemented in Australia.
For clients who are likely to be affected by Division 296, an important issue will be to review the most tax-effective investment structures in which to hold assets and determine the potential impact of this new tax based on their unique circumstances. Super has been the clear winner in the past but, once the new rules are in place, other vehicles such as companies or discretionary trusts may also be useful options. As clients consider alternative investment structures, it is a timely reminder for them to review their estate planning.
What you can do to Protect your Estate Plan
Remember that Division 296 tax is not law yet and could change before being finalised. Estate planning and the succession plan for client SMSF’s will need to be revisited once Division 296 is law. Naturally, we would be happy to assist with a review of your estate plan or assist advisers with their own clients.
It will also be important to balance asset protection against tax effectiveness. For some individuals, the asset protection provided by the super system may outweigh the tax benefits of other investment vehicles, such as a family trust. Division 296 will require more frequent and detailed asset valuations, so individuals will need to balance this administrative burden with the tax benefits provided by super.
The Takeaway
The new $3 million total superannuation balance cap under Division 296 represents a significant shift in superannuation policy, with direct implications for estate planning. High net-worth individuals must reassess their superannuation and estate strategies to ensure they remain tax-efficient and compliant. By leveraging professional advice and revising their investment approaches, individuals can mitigate the impact of these changes and secure their financial legacy for their beneficiaries under a robust estate plan.
Disclaimer
The information contained on this website is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved.
Accordingly, the information on this site is provided with the understanding that the authors and publishers are not providing legal advice. As such, it should not be used as a substitute for consultation with professional legal advisers. Before making any decision or taking any action, you should consult with a professional lawyer from Rouse Lawyers.
Liability Limited by a scheme approved under Professional Standards Legislation.