Navigating superannuation can be tough without expert help. This is especially true with the new Division 296 tax. As a trusted financial advisor, Precision Wealth Management is here to help you understand how this tax might affect your investments and your hard-earned super.
What is Division 296 tax?
Division 296 Tax is proposed to start on 1 July 2025. The first tax point will be at the end of the financial year on 30 June 2026.
Division 296 adds a 15% tax on earnings from your Total Superannuation Balance (TSB) on anything over $3 million. This is in addition to the current 15% tax on earnings and could raise the total tax to 30%. One of the major objections to this new tax is the inclusion of the tax on unrealised gains, which has raised concerns about fairness and valuation complexity.
How does Division 296 tax work?
Consider an example where your super fund balance grows from $3.5 million to $4 million with no contributions or withdrawals. The $500,000 increase is subject to the Division 296 tax, but only 25% of this gain is above the $3 million threshold. Therefore, the additional tax would be $18,750 for that financial year. If this return has come through capital growth of an illiquid asset and the fund doesn’t have any liquid assets to pay this tax liability, it would be forced to sell the asset to pay the tax liability. However, if your balance drops back to $3.5 million the following year, you won’t receive a refund for the tax paid, even though the gains have disappeared.
A significant area of concern is the lack of indexation on the $3M cap. A great example of this is the Div 293, which is an additional superannuation tax for those earning above $250,000. When it was initially introduced in the 2012-13 financial year, it was for individuals with income over $300,000, impacting few. After a few years, it was reduced to $250,000 and has remained at that level ever since. Div 293 tax now captures many more Australians than it originally affected. Div296 tax could very well go the same way.
Strategic considerations
For those nearing the $3 million balance, it might be beneficial to hold some assets outside of superannuation, especially when retired or nearing retirement. This strategy could potentially result in a lower effective tax rate in retirement.
Additionally, if one spouse is a higher income earner, you can consider super splitting 85% of your concessional contributions to your spouse or a re-contribution strategy to spread the superannuation balance evenly across couples, as the $3 million threshold applies to each individual.
If it looks like one member of a relationship is on track to go over the threshold, it is important to plan ahead because it might not be possible to make significant changes in any one year.
For those who are over preservation age, the most common strategy could be to make withdrawals towards the end of a financial year to reduce the tax according to how far over the $3M threshold the fund is. In the example above, where they would have an additional tax of $18,750, it would be reduced to $10,717 if they withdrew $500,000 before the end of the financial year. However, you would need to consider if the withdrawn money will be introduced into a higher taxed environment.
Why consult a financial advisor?
To understand the complexities of Division 296 tax, visit Precision Wealth Management. We are located in North Lakes and Birtinya in the Sunshine Coast and provide our clients with financial planning services that offer clarity and strategic guidance. At Precision Wealth Management, we specialise in helping pre-retirees and retirees navigate opportunities and challenges, ensuring your financial strategies align with your long-term goals.
Understanding the implications of Division 296 tax is crucial for effective retirement planning. Contact Precision Wealth Management today to learn how our expert financial advisors can help you manage your superannuation and optimise your financial future, giving you peace of mind that you are in safe hands.
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DISCLAIMER – The information provided in this blog is general and does not consider your individual financial needs or objectives. It does not constitute personal advice. We recommend seeking out professional and independent financial, legal and tax advice which has been designed for your individual situation before acting on any information contained below.
