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New Division 296 Superannuation Rules: What You Need to Know

We understand the importance of keeping our clients informed about changes in legislation that impact their Self Managed Superannuation Funds (SMSF). The proposed Division 296 tax is one such change that will affect high-balance superannuation accounts. In this article, we break down the key points of this proposed new rule and provide guidance for different scenarios.

1. Members Over 65 with Balances Over $3 Million

For individuals aged 65 and above with superannuation balances exceeding $3 million, the proposed Division 296 tax will apply. Here are the details:

  • Tax Rate: An additional tax of 15% will be levied on the earnings on superannuation benefits over $3 million at the end of a financial year.
  • Calculation Method: The tax is calculated based on the movement between the member’s opening and closing balances for the year, adjusted for withdrawals, contributions, and other specific exclusions. This effectively taxes unrealised capital gains without the benefit of the capital gains tax discount.

Once you have reached age 65, you have met a condition of release, and subsequently have options available to you including the option to withdraw some of your superannuation and invest funds outside of the superannuation environment. Modelling shows that while the introduction of Div 296 will reduce the benefit of having investments in superannuation, it is still generally beneficial to retain investments within the superannuation environment compared to the alternative.

However, there is an opportunity to review this on a member-by-member basis as personal circumstances may result in benefits for some members in making changes. We recommend meeting with your accountant and financial adviser to discuss your personal position and the options available to optimise your situation.

2. Members Over 65 with Balances Under $3 Million

For members aged over 65 with balances under $3 million, there are no changes related to the proposed Division 296 tax. However, it’s essential to monitor account balances and consider tax-efficient strategies.

If you have a member balance close to $3 million, it will be worth discussing with your accountant and financial adviser whether you should consider future contributions that may take you over the limit. Having met a condition of release, you have the option of reducing your balance if you do find yourself over the new limit.

3. Members Under 65 with Balances Over $3 Million

Younger members with balances exceeding $3 million will also be subject to the Division 296 tax. Here’s what you need to know:

  • Tax Rate & Calculation: The 15% tax applies to the movement between opening and closing total balances, adjusted for withdrawals, contributions, and other specific exemptions. This effectively taxes unrealised capital gains without the benefit of the capital gains tax discount.
  • Unrealised Gains: The effective tax on unrealised asset valuations may impact cash flow if assets have not yet realised their value.

If you are aged under 65, you may not have met a condition of release, and therefore have limited options available to you (as you will not be able to consider withdrawing some of your superannuation and investing it outside of the superannuation environment). Modelling shows that while the introduction of Div 296 will reduce the benefit of having investments in superannuation, it is still generally beneficial to retain investments within the superannuation environment compared to the alternative.

However, there is an opportunity to review this on a member-by-member basis to understand the implications of future contributions. We recommend meeting with your accountant and financial adviser to discuss your personal position and the options available to optimise your situation.

4. Members Under 65 with Balances Under $3 Million

For clients under 65 with balances below $3 million, there are no immediate implications related to the proposed tax. However, it’s crucial to stay informed and plan for future growth.

It is important to remember that these rules are a proposal only at this stage. They are not yet law. They are proposed to come into effect on 1 July 2026 so there is still time to make adjustments to your investments once you have considered your circumstances.

We expect to see an outcome on this prior to 30 June 2024. As such, we recommend consulting with our team once the laws are in place (assuming they are legislated). We expect we will have twelve months to work with your financial planner to tailor strategies based on your individual circumstances. Our goal is to help you navigate these complex regulations and assist you in optimising your superannuation.

Disclaimer

The content provided in this newsletter article is for informational purposes only and does not constitute financial advice. While we strive to ensure accuracy, we recommend that readers consult with a licensed financial advisor or seek professional guidance specific to their individual circumstances. The information presented here may not cover all aspects of superannuation regulations or tax implications. It is essential to conduct further research and consider seeking personalised advice before making any financial decisions related to superannuation. Grenfell Murray Pty Ltd disclaims any liability arising from reliance on the information contained in this article. Readers should exercise due diligence and verify details independently. We do not endorse any specific products, services, or investment options mentioned herein. Remember that superannuation laws and regulations can change, and individual situations vary. Always consult with professionals who are up to date with the latest developments in superannuation. 

Current as at 11 March 2024.

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