Treasurer Jim Chalmers has confirmed that the Federal government will proceed with its plan to increase the tax rate on superannuation earnings for balances exceeding $3 million.  It is widely anticipated that the previously lapsed legislation, which had a commencement date of 1 July 2025, will be reintroduced following the re-election of the Albanese government.

The proposed legislation as originally drafted seeks to tax earnings on certain superannuation accounts at a rate of 30%.  The additional 15% referred to as “Division 296 tax” is forecasted to impact approximately 0.5% of superannuation accounts, however, it is the nature of how it impacts the funds that is most concerning.

In simple terms the proposed Division 296 are as follows:

• A flat additional 15% tax (in addition to Division 293 and the income tax paid by the superannuation fund) will apply to the “earnings” of the fund, if a member’s balance is in excess of $3m;
• Earnings are defined in simple terms to be the movement in a member’s balance adjusted for deposits and withdrawals. This by definition means that the tax is levied on the movement in the market value of the assets of the fund and therefore includes unrealised capital gains;
• If the superannuation fund has a year of poor performance and has a negative return, there is no refund of tax;
• There is no plan for the $3m threshold to be subject to indexation meaning that over time the impact will be felt across wider parts of the community;
• The tax will be imposed directly on individuals at first instance although a member can elect to pay the tax from their superannuation account, similar to the way Division 293 contributions tax is levied and paid).

The proposed legislation as currently drafted proposes taxing unrealised gains arising on balances in excess of $3m. As such, the practical impact could be demonstrated with these two common examples follows:

• the superannuation fund holds shares in a company listed on the ASX. At year end the share price increases resulting in an increase in value but subsequently drops after year end back to cost.  In this situation a real tax liability will arise even if the share is ultimately sold for no gain.
• The superannuation fund holds real property (eg business premises or investment property). The rules concerning valuations mean that the property has to be revalued which results in an increase in value and a tax liability.  There is no realisation event and no additional cashflow to fund the tax liability.

It should be noted that the imposition of the Division 296 tax does not impact the underlying cost base of the assets for tax purposes.  As such, if an amount has been subject to tax under Division 296 and is then subject to CGT on disposal under the “standard rules” the economic outcome is 2 taxes on the same economic gain.

Given the stated intention of the Federal government, taxpayers with more than $3m in their superannuation fund should be considering how the proposed changes will impact them including the funding of the tax liabilities without cash proceeds.

the potential impact of the introduction of the Division 296 tax and

If you have any questions on how the changes from 1 July 2025 may impact you, please reach out to your Engagement Partner.