Div 296 tax draft regulations released including the “after death” death tax
Treasury has released draft regulations for its now legislated Div 296 tax.
The draft regulations contain a number of measures including:
the formula to be used for SMSFs (supported by an actuarial certificate) when calculating a member’s relevant superannuation earnings (ie the amount of the fund’s assessable income that will be attributed to the member)
the factors that large APRA superannuation funds must take into account when doing a fair and reasonable calculation of a member’s relevant superannuation earnings (ie the amount of the fund’s assessable income that will be attributed to the member)
the prescribed capital gains tax adjustment factors for large APRA superannuation funds for the 2027/28 year to the 2029/30 year
various Div 296 methodologies for defined benefit pensions
The “after death” death tax
The biggest surprise in the regulations is the application of Div 296 tax for deceased members.
The legislation provides that Div 296 tax is triggered to a deceased member in the year they die but does not expressly apply in subsequent years.
The regulations expressly capture this with a new “integrity rule”. The integrity rule provides that not only does Div 296 tax apply to the year of death but also applies to the deceased’s account in subsequent years until all of the death benefits have been paid out.
The regulations provide that these future year attributable earnings will be counted for the deceased’s relevant superannuation earnings in the year the deceased died. That is, the executor will receive one Div 296 tax assessment that covers the year of death and subsequent years in which the death benefits have not yet been fully paid out.
This has the effect that:
Div 296 tax cannot be avoided by deferring sales of capital assets in the year after death
The executor may not receive a Div 296 tax assessment for a number of years if there is a delay in paying out the death benefits
Executors may have to defer the final administration of the estate until such time as the member’s death benefits have been fully paid and the Div 296 tax assessment has been issued.
The explanatory statement to the regulations gives the following example of how this will work:
Example 14: Relevant superannuation earnings in relation to a superannuation interest of a deceased individual, with benefits distributed from the interest in a year after death
Tim and Dawn are members of an SMSF with accumulation interests worth a total of $8 million on 30 June 2028. Neither of them has any other superannuation interests. An actuary has certified that the share of the total funds is distributed evenly between Tim (50 per cent) and Dawn (50 per cent) such that their respective TSBs are valued at $4 million. As Tim and Dawn’s respective TSBs at the end of the 2027-28 income year are greater than the large superannuation balance threshold of $3 million, they are both in‑scope for Division 296 tax.
On 23 June 2029, Dawn passes away. Dawn’s TSB upon that date is subsequently taken to be nil (see section 296-50 of the Amending Act). However, Dawn’s interest is composed of several different assets which take time to be sold in order to pay out the superannuation death benefits related to this interest. The fund sells a number of assets and her interest in the SMSF is fully distributed on 12 September 2029.
As Dawn’s superannuation interest had not been fully distributed as a superannuation death benefit until the following income year after her death, this means that to work out Dawn’s relevant superannuation earnings for Division 296 purposes and her Division 296 tax liability for the 2028-29 income year, her earnings must also take into account earnings of her interest in the 2029-30 income year up and until the interest is paid out.
In the 2028-29 income year the SMSF had Division 296 fund earnings of $500,000 for the fund year. An actuary certified that the amount attributable to Dawn’s interest for was $250,000. Her interest was valued at $4.25 million on 30 June 2029.
In the 2029-30 income year, the SMSF had Division 296 fund earnings of $1 million for the fund year (in part due to the sale of several assets to pay out her death benefit). An actuary certified that the amount attributable to Dawn’s interest was $162,848. The actuary determined her interest in the fund was valued at $4.25 million for 20 per cent of the year, and then $0 for the remaining part of the year as a result of her interest being paid out as a superannuation death benefit, giving an average value of $850,000.
Dawn’s total superannuation earnings for 2028-29 (the year she died) is $412,848. This is the sum of the relevant superannuation earnings attributed to her interest in the 2028-29 and 2029-30 fund income years.
Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
Epbroderick@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
Ealin@sladen.com.au
