The much talked about “Division 296” draft legislation has been released and was sent for feedback just before Christmas, likely to minimise critical responses.
Key points for consideration are included below:
Unrealised gains tax dropped
Unrealised gains will no longer be taxed. This was criticised by many and loved by no-one so its not a surprise.
Under the original proposal, super funds could have been taxed on paper gains — even if no asset was sold and no cash was received. The revised draft now applies standard tax principles, meaning only realised capital gains will be included when calculating earnings for Division 296 purposes. Instead, traditional tax principles will apply to calculating “earnings”.
This change removes a major source of unfairness and volatility that made the original proposal so dangerous, particularly for SMSFs holding property, farms, or other illiquid assets.
Indexation introduced
The original version locked in the $3 million threshold indefinitely, meaning inflation alone would have dragged more Australians into the tax each year. The revised legislation confirms that the $3 million threshold and $10 million threshold, will now be indexed to inflation.
Thresholds and tax rates remain but with a new extra sting at $10 million
The Government is still sticking to the $3 million threshold for the additional 15% superannuation earnings tax. However, a second tier has now been introduced:
- 15% extra tax on earnings attributable to balances above $3 million
- An additional 10% surcharge (25% total) on earnings attributable to balances above $10 million
Despite the political messaging around this being a “tax on the wealthy”, the framework is now in place and frameworks have a habit of expanding over time.
New calculation method closes an obvious loophole
Another quiet but important change relates to how the $3 million threshold is measured.
Previously, the calculation was based solely on a member’s balance at 30 June. Under the revised proposal, the calculation will now use the greater of the member’s opening or closing balance for the financial year. This is clearly aimed at stopping people from temporarily withdrawing funds before 30 June to avoid the tax.
When will Div 296 be legislated?
The consultation period was short ending on 16 January (while every superannuation and tax professional is on leave), expect this to be legislated by 30 June. Exposure draft is here.
Redwood thoughts
It’s a bad tax as any tax is, punishing self-funded retirees who have relied on “current” Superannuation Law to plan their retirement and now after effective wealth planning they are getting “stung”. This will just move money out of the superannuation system into other structures such as Family Trusts. It is imperative that members effected received specialist advice. Yes, the worst features have been softened. Yes, unrealised gains are off the table.
History shows how this works: thresholds shift, rules expand, and what starts as a narrow measure becomes the baseline for broader taxation. Watch this space!
