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The new Div 296 draft legislation - Part 4 - issues identified with the new provisions

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This is our fourth article on the draft legislation for the new Div 296. Our first article examined the core legislation; our second article examined the transitional rules and the third article considered the problem that arises for indirect assets. This article will examine other issues with the proposed new Div 296.

Improvement

The proposed new Div 296 design is an improvement on the original design in that it only applies to income and gains as they are derived (and not to unrealised gains). In addition, the $3 million cap (and the new $10 million cap) will be indexed.

Issues

While the new design has some improvements, there are still some issues with the design, including:

  • The design is not sector neutral – with different regimes for SMSFs and large/public offer superannuation funds

  • The design is not product neutral – with different regimes for contribution accounts, defined benefit accounts and constitutionally protected accounts

  • The “higher of two balances” approach for measuring the total superannuation balance produces unfair outcomes by potentially taxing members whose balances drop below $3 million in a financial year (eg due to reduction in asset values)

  • Taxing members in the year they die – potentially having the tax paid by the estate when benefits are received by others and/or receiving Div 296 assessments after an estate has been distributed

  • The potential for SMSF income/gains to be included in a member’s Div 296 calculation after they roll out of a SMSF part way through a financial year

  • Applying the cost base adjustment on an all or nothing basis with the result that capital losses will be lost for Div 296 purposes

  • The non-portability of the cost base adjustment (eg if a member moves to a new SMSF after a divorce)

  • The likely obligation for SMSFs to obtain actuarial certificates for Div 296 calculations (even if the SMSF is accumulation mode)

  • The “net ECPI” calculation only including deductions under section 8-1 of the Income Tax Assessment Act 1997 and not other deductions available to SMSFs

  • The inability to reduce benefits if the member has not met a condition of release (therefore, “trapping” such members in the Div 296 regime)

Submissions to Treasury

Many of the above issues have been raised with Treasury during the consultation. Therefore, it is hoped that some or all of these issues will be addressed in the final legislation and regulations.  

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

Jan Harnischmacher
Associate
T +61 3 9611 0158
E joh@sladen.com.au

Andrea Lin
Lawyer
T +61 3 9611 0189
E alin@sladen.com.au

Phil Broderick