The Federal Government has released exposure draft legislation for consultation, seeking to implement certain superannuation-related measures announced in the 2023-24 Federal Budget. Issues raised at the time the measures were initially introduced, including that the measures impose tax on unrealised gains in superannuation funds, continue to raise significant concern.
Key takeaways
- An additional tax - ‘Division 296 Tax’ - of 15% will be imposed in respect of earnings attributable to superannuation balances above $3 million. In practice, this will result in an overall tax rate of 30% being applied to a percentage of future earnings equal to the percentage of an individual’s ‘Total Superannuation Balance’ (TSB) above $3 million.
- There continues to be significant concerns around the taxation of unrealised gains in superannuation funds, and the tax treatment (including any risk of double taxation) once those gains are realised. There appears to be no adjustments for this situation.
- While it may be feasible for those who have retired to avoid being taxed on unrealised gains by withdrawing funds from their superannuation accounts, there is currently no provision for individuals who are yet to retire to withdraw amounts from their superannuation and thereby reduce their TSB below the $3 million threshold.
- The exposure draft suggests that the threshold (currently $3 million) will not be indexed in the future, meaning the measures may not account for inflation over time.
- It is currently unclear how illiquid assets should be valued when calculating an individual’s TSB, which may result in significant variances between a taxpayer’s and the Commissioner’s valuation of particular assets.
- Negative earnings, to the extent attributable to a TSB over $3 million, may only be carried forward and offset against superannuation earnings that would be subject to the additional tax. The negative earnings have limited use where an individual’s TSB drops below $3 million in subsequent financial years.
- The additional tax will be imposed directly on the individual. While there is provision for individuals to have amounts released from certain superannuation funds to facilitate payment of this tax, this may not be a feasible option where the “earnings” are attributable to unrealised gains on illiquid assets.
- It is unclear how the administration of this tax will occur at the superannuation fund level, including how funds will track and record the satisfaction of the relevant tax liability. This may involve increased administrative obligations for superannuation funds to ensure members comply with the new measures.
As announced in the 2023-24 Federal Budget, the Federal Government is proposing to reduce the tax concessions available to individuals with a total superannuation balance (TSB) exceeding $3 million. The exposure draft legislation, being:
- Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023 (the Substantive Bill); and
- Superannuation (Better Targeted Superannuation Concessions) Imposition Bill 2023 (the Imposition Bill),
(together, the Exposure Drafts), seek to implement this change.
The changes are proposed to apply from 1 July 2025.
There continues to be a number of concerns with the proposed measures, including uncertainty around how certain assets (including illiquid assets) will be valued.
Key features of the Exposure Drafts
Proposed new Division 296 of the 1997 Act
The Exposure Drafts introduces a new Division 296 in the Income Tax Assessment Act 1997 (Cth).
The additional tax (referred to as the Division 296 tax) is imposed at a rate of 15% on a percentage of earnings equal to the percentage of an individual’s TSB exceeding $3 million for an income year. The Division 296 tax does not appear to apply where:
- the superannuation income stream is paid to a child recipient at the end of the year; or
- a structured settlement contribution has been made in respect of the relevant taxpayer; or
- the taxpayer dies before the last day of the year.
Total superannuation balance
The relevant percentage of earnings on which the additional tax is proposed to be imposed is referred to as “taxable superannuation earnings”, which is calculated by comparing an individual’s TSB at the end of the relevant income year to the individuals TSB at the end of the previous income year. The change in the TSB over this period is used as a proxy for the earnings generated by the fund and will include unrealised gains or losses. The current TSB will be adjusted to account for certain withdrawals and contributions during the income year.
The TSB includes all Australian superannuation interests (e.g. APRA-regulated funds, SMSFs and exempt public sector schemes) held by the individual, but does not include superannuation interests in a foreign superannuation fund. There are also exceptions for superannuation interests in constitutionally protected funds.
The value of the TSB is proposed to be determined by reference to the total amount of superannuation benefits that would be payable if an individual had the right to cause the relevant superannuation interest to cease at that time. There is also power for regulations to determine the method or value to determine the TSB. For the purposes of Division 296, limited recourse borrowing arrangement amounts are to be disregarded, to ensure that tax is only calculated on net assets.
Negative superannuation earnings
Negative superannuation earnings in an income year may be carried forward (transferrable) to future income years. The application of negative superannuation earnings is dependant on an individual’s TSB continuing to be greater than $3 million (being the ‘large superannuation balance threshold’).
Payment of tax liability
Division 296 tax is payable 84 days after a notice of assessment by the Commissioner of Taxation is given in relation to Division 296 tax. This is unless the tax is deferred to a “Division 296 debt account for a superannuation interest”.
General Interest Charge (GIC) may apply to unpaid overdue assessed amounts.
Taxpayers may pay the tax liability by releasing amounts from one or more of their superannuation interests, or paying the liability from resources outside of the superannuation system.
Next steps
KWM is planning to submit a response to the consultation on the Exposure Drafts, which ends on 18 October 2023. Should you wish to discuss the Exposure Drafts and how it may affect you, please contact one of the authors or your KWM contact.
