As you may know, Treasury has released draft legislation for the proposed extra 15% tax on superannuation balances over $3 million for consultation. The proposed new tax, now known as Division 296 tax, is largely unchanged from when it was first announced by the government earlier this year.
We will discuss how this draft proposes the tax will be calculated along with an example.
A member’s Total Superannuation Balane (TSB) is worked out based on the normal TSB rules with the following adjustments. A member’s TSB is increased by adding back in the following withdrawals:
Superannuation benefit payments
Spouse contributions split to the member’s spouse
Family law splits to an ex-spouse
Amounts withheld from an excess untaxed rollover amount
Amounts taken out via release authorities
Withdrawals are added back to reflect what the individual’s current TSB would have otherwise been had they not made the withdrawals. This adjustment will ensure that a decrease in a member’s TSB because of a withdrawal does not represent negative earnings generated inside superannuation. A member’s TSB is reduced by the following contributions:
Contributions (including 85% of concessional contributions)
Spouse contribution splits received by a spouse
Family law splits received by an ex-spouse
Death benefit pensions received by a beneficiary(s)
Death or permanent disability insurance proceeds received
Certain amounts allocated from a reserve
Foreign superannuation fund transfers
Remediation payments or compensation received as a result of fraud or dishonesty
These reductions are intended to ensure an increase in the member’s closing TSB reflects only positive earnings, not new amounts added to superannuation during the year that have caused the member’s TSB to increase. Luckily, limited recourse borrowing arrangement (LRBA) loan amounts that would otherwise be included in a member’s TSB will be excluded for Division 296 tax purposes. That said, this rule will remain included for other purposes. It is disappointing this rule wasn’t abolished altogether as given the strict rules around LRBAs and the safe harbour terms that apply, this rule is no longer needed. Note that the draft legislation modifies the definition of TSB in a way that removes the link between a member’s transfer balance account and calculation of their TSB. This means a member’s TSB will no longer be calculated by referring back to the transfer balance account for pension interests. This is because the calculation of earnings for the Division 296 tax requires valuations of income streams to be applied on an annual basis. Regulations will be needed to clarify how some interests will be valued (eg, defined benefit pensions). This change would apply from immediately before 1 July 2025 and apply for all purposes where TSB is relevant (eg, determining the non-concessional cap for a member). Although the draft legislation now provides clarification regarding what amounts will be included as contributions and withdrawals, the government’s adjustments fall short of the industry’s expectations by:
Failing to exclude reversionary pensions or death benefit pensions from an inheriting spouse’s TSB
Failing to exclude disability insurance benefits from a member’s TSB altogether, like structured settlement amounts (discussed below)
Adding back of amounts withdrawn as disability benefits or under a release authority for the payment of superannuation related taxes.
Example – paying Division 296 tax Jess has a Total Super Balance (TSB) of $4 million on 30 June 2025, and $4.5 million at 30 June 2026. Jess receives concessional contributions to superannuation of $27,500 in the 2025-26 income year, including $9,500 in salary sacrifice contributions. For Division 296 tax purposes, her total contributions for the year are $23,375 after correcting for the 15% tax paid by her superannuation fund on these concessional contributions (ie, 85% x $27,500). Jess’s adjusted TSB at the end of the year is calculated to be $4,476,625 by deducting her total contributions of $23,375 from her end of year TSB of $4.5 million. Jess’s superannuation earnings for Division 296 tax in the 2025-26 income year are calculated as $476,625 by subtracting her previous TSB from her adjusted current TSB ($4,476,625 – $4 million). As Jess does not have unapplied transferrable negative superannuation earnings, her superannuation earnings for the 2025-26 income year will be $476,625. As her TSB at the end of the year is greater than $3 million and her superannuation earnings for 2025-26 are greater than nil, Jess will have taxable superannuation earnings for Division 296 tax purposes. The percentage of Jess’s superannuation earnings above the $3 million threshold is calculated as 33.33% by calculating the percentage of her TSB at the end of the year over $3 million rounded to 2 decimal places (($4.5 million – $3 million) / $4.5 million). Jess’s taxable superannuation earnings for Division 296 tax are calculated as $158,859 by multiplying her superannuation earnings by the percentage of the earnings above the threshold (33.33% x $476,625). This taxable superannuation earnings amount will be taxable at 15%. Jess will have a Division 296 tax liability of $23,829 for the 2025-26 income year ($158,859 x 15%).