With the recent Labor election victory, and a potentially friendlier Senate, it is likely that the proposed Division 296 tax of an additional 15% on members with a $3 million or more total super balance (not indexed) will be enacted. See here for our previous commentary on the measure.
Will the measure commence on 1 July 2025?
At the date of this article, no announcements have been made in relation to the future of Div 296, including whether the proposed start date of 1 July 2025 will be deferred. Industry representatives are already pushing for a deferral.
Our guess is that there will not be a deferral and Div 296 will commence on 1 July 2025 as planned.
Should affected members act now or wait until the legislation has passed?
This is a personal question for each member that they will need to consider in the context of their own personal circumstances.
That said, such affected members should at least consider the potential application of the new measure and what actions (if any) they may wish to take before 30 June 2025 or in the 2025/26 financial year.
However, some members may have been considering, or will now consider, taking actions regardless of whether Div 296 is passed. In such situations they may wish to bring forward such plans to implement them before 30 June 2025 (if possible).
If I want to take amounts out of super, do I have to do this before 30 June 2025?
Some members may wish to avoid, or reduce, the application of Div 296 by reducing their account balances (this is discussed further below) – assuming they have met a condition of release which allows them to withdraw benefits.
In many cases, it will be preferable to do this before 30 June 2025 (assuming the measure starts on 1 July 2025). This will mean their opening balance at 1 July 2025 will be lower (eg below $3 million) and result in them not being subject to Div 296 or reducing its impact.
In addition, if withdrawals (and/or drops in value of assets) results in the member’s total super balance dropping below $3 million by 30 June then Div 296 tax will not be triggered for that year.
That is withdrawing sufficient benefits/assets before or during the 2025/26 year to drop the member’s balance below $3 million by 30 June 2026 will mean that Div 296 is not triggered for the 2025/26 year.
Even if a member’s balance will be greater than $3 million at 30 June 2026, taking benefits out in the 2025/26 financial year can also reduce the impact of Div 296. While the opening balance will still be higher and the closing balance will include the benefits taken out, taking out benefits before 30 June 2026 is likely to reduce the earnings over the year and reduce or eliminate the Div 296 tax.
A simplified example of this is as follows. Mary, the sole member of her SMSF, has a super balance of $4 million at 1 July 2025. The SMSF transfers a $1 million commercial property to Mary as an in-specie benefit in September 2025. Her account balance at 30 June 2026 is $3.3 million. Mary’s opening account balance is $4 million. Her adjusted closing account balance (after adding back the lump sum benefit) is $4.3 million. She will have “earnings” of $300K. Those earnings are multiplied by the proportionate formula ($3.3 million - $3 million /$3.3 million) and the 15% tax rate. That will result in $4,090.91of Div 296 tax.
This is to be contrasted with the situation if she had taken out more benefits such that her balance at 30 June 2026 is less than $3 million, where no Div 296 tax would be triggered.
However, the above example could have potentially had a higher tax bill if she had not taken out the property as the tax has not been triggered on any rent or capital growth from September 2025 onwards. It has also lowered the end of year total super balance in the proportionate formula, resulting in a lower effective tax rate. In addition, Mary is likely to have a lower the Div 296 in future years.
What options are available for members affected by the measure?
It is important to note that each option must be considered in the particular context of the member’s personal circumstances and, where applicable, the SMSF. In this light, many affected members will benefit from considering each option and modelling their effects in their particular circumstances.
For example, an immediate reaction may to be take benefits out of super to avoid the application of the measure. However, modelling may show that this is not the best course of action.
Option 1 – ensure valuations are accurate before the measure commences
To the extent that an SMSF has assets such as real estate and investments in private companies and unit trusts, the value of the assets should be accurately recorded as at the commencement of the measure (eg 30 June 2025). Any growth of the value of the assets and the member’s benefits are effectively grandfathered from the new regime.
Option 2 – take benefits out of super
Benefits taken out of super will avoid or reduce the application of Div 296. If they are taken out prior to the introduction of the measure, they will not be caught by the new tax. If they are taken out after its introduction, they will likely reduce the application in that year but will not be caught in future years (see the example above).
But will the member be better off? While they may avoid the application of Div 296 (and its application on unreleased gains), they may ultimately have a worse off tax position. For example, if they invested in individual names, the tax could be up to 47% on income and 23.5% on discounted capital gains. These headline tax rates could be less than the Div 296 tax and SMSF taxes (although this depends on the marginal tax rates of the individuals).
Likewise, companies attract a 30% tax rate and shareholders can have an effective tax rate of 47% on dividends.
However, if the benefits were not invested and were used, for example, for improvements to a main residence, daily expenses or gifts to children, then the member may be better off taking the benefits out of super.
Taking out assets
Some members may consider taking their benefits out by way of an in-specie transfer of assets – eg real estate or shares.
In such circumstances, the modelling will need to include the consideration of potential transfer costs vs the cost of Div 296, these include:
Capital gains tax payable by the SMSF
Land transfer (stamp) duty for transfers of real estate (noting there is a potential duty exemption in Victoria)
Landholder duty for transfers of units or shares in land rich unit trusts or companies (noting there is a potential duty exemption in Victoria)
GST
Dealing with tenants and issues in the lease
Legal and regulatory costs associated with the transfer and duty exemption applications
The future tax position of the assets being held by the member or an entity
The cost of subsequently transferring the asset from the member to a related entity (including duty)
In Victoria, entering into the commercial industrial property tax regime for transfers of commercial or industrial property (although not if a duty exemption applies)
Future land tax position (eg aggregation with the member’s existing property holdings or triggering trust surcharges)
Option 3 – do nothing
As noted above, modelling may establish, at least in the short or medium term, that the member is still better off keeping their benefits in super (even if Div 296 is payable).
In this case, the planning is more about ensuring that there is sufficient liquidity to pay the Div 296 tax – either inside or outside of super.
One of the interesting quirks of the measure is that Div 296 tax is payable by the member personally (although they have the option to take benefits out of super to pay the tax). Therefore, some members, who have sufficient cash outside of super, may choose to pay the tax outside of super and therefore potentially allow their super to continue to grow.
Download the PDF of the article here: If Div 296 comes back – what should members and SMSFs do?
For further information please contact:
Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E pbroderick@sladen.com.au
Philippa Briglia
Special Counsel
T +61 3 9611 0174 | M +61 449 404 801
E: pbriglia@sladen.com.au
