Nick Bruining: Division 296 tax change on superannuation balance of $3m a ticking bomb for young workers

A controversial tax designed to slug large superannuation account balances is set to be debated in the Senate this week, with the outcome likely to be decided by the Greens and crossbenchers. The Division 296 tax will see fund members charged an extra 15 per cent tax on earnings when the total account balance exceeds $3 million. If passed, the new tax will apply from July 1, 2025 and will cover super fund returns applicable for the 2025-2026 tax year. The proposed tax has generated fierce debate over the way it is applied. Under current income rules, tax is only payable when the asset is realised or sold and converted into cash — the theory being that the cash is on hand to meet the associated tax debt. Under the proposed legislation, the tax will be payable whether the asset is sold or not. For example, a member with a total superannuation balance of $3m on July 1, 2025 might contribute $100,000 over the year but withdraw $200,000 in payments. Assuming the fund is worth $3.3m on June 30 2026, the “growth” attributed to the period would be $3.3m, less the $100,000 contribution, plus the $200,000 withdrawal, less the $3m opening balance. That works out to be a $400,000 gain, which will generate a $60,000 tax liability. The liability is to the individual, not to the fund — though the member can choose to have the fund pay the debt. The tax debt for these unrealised gains will need to be paid within 60 days if it is being covered by the member, or 84 days if the fund is footing the bill. In some cases, if the cash is not on hand, this could cause financial stress if assets are forced to be sold at an inappropriate time to meet the tax debt. The total super balance figure used to calculate the tax includes amounts held in accumulation and retirement phases. Independent financial planner David Jarrott said some of his clients are likely to be affected. “I think a lot of wealthy people might look seriously at holding assets outside of superannuation, but it will depend on how far over the $3m threshold you are,” Mr Jarrott said. James Stephan specialises in intergenerational wealth transfer strategies for families and said self-managed superannuation could be another useful tool. “You have a lot more options if your children are members of the same superannuation fund. You can cash out and recontribute in their name to essentially spread the balances around,” Mr Stephan said. While few Australians are expected to be affected by the tax in the short term, another controversial aspect is that the $3m threshold is not indexed. Projections show a significant part of the population is likely to be affected by 2050. “That and the fact that a couple, each with decent amounts in super, can reach the threshold if the super is passed to a spouse on death,” Mr Jarrott said. “The prediction that just a few thousand are affected is rubbish. This will hit people sooner than they think.” Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association