August 2025 Ask Graeme Webinar

Main Issues with Division 296

The operation of Div 296 and the manner in which the tax liability is calculated has a number of issues which need to be considered.  These will determine whether superannuation continues to be as attractive as in the past.  The two main concerns with Div 296 are:

• the taxation of the ‘growth’ element in a member’s TSB over the year of income including the imposition of tax on unrealised capital gains on a year-by-year basis, and
• the lack of indexation of the ‘large superannuation threshold’ of $3 million.

In addition to these main issues there is also:

• • valuation of fund assets on a market value basis,
  • discrimination in the flexibility to withdraw benefits for those who meet or don’t meet a condition of release as part of the introduction of Div 296 tax,
  • payment of the tax from the fund, especially SMSFs, which may have a significant proportion of the fund in illiquid assets,
  • no notional CGT discount in calculating the adjusted TSB on assets that have been owned by the fund for greater than 12 months,
  • No opportunity to equalise balances between spouses prior to the introduction of Div 296 tax,
  • at the time the legislation was released in October 2023 it was estimated that 80,000 members would be impacted on an ongoing basis by the introduction of Div 296.  If the proposed legislation commences on 1 July 2025 the number of members impacted by Div 296 tax is likely to increase beyond that estimate,
  • there is no adjustment to losses carried forward if the member’s adjusted TSB falls below the $3 million threshold, and.
  • effective double tax on taxable capital gains and unrealised capital gains attributable to the adjusted TSB above the member’s $3 million cap.

When will the $3 million cap become an issue?
It is difficult to predict when the impact of Div 296 tax will become an issue as it depends on the  particular circumstances of the member involved.  Those circumstances, not in any particular order, depend on:

• The member’s current TSB and the adjusted TSB,
• The income and capital growth of fund assets,
• The amount of contributions made over time in respect of the member by their employer, the member and others,
• The rate of increase in the indexation of the contribution caps and the total superannuation balance cap.
• The amount withdrawn from the fund during the year as lump sums and pensions
• The member’s age,
• The age of the member’s spouse,
• Whether the member satisfies a condition of release,

Before alternative arrangements to superannuation are considered it is probably worthwhile to  consider strategies which take advantage of the current superannuation rules to reduce or possibly eliminate the impact of Div 296.

Who will be impacted immediately by Div 296?
Members under age 60?
The main group of fund member’s immediately impacted by Div 296 are those:

• those under age 60,
• not meeting a condition of release with a ‘nil’ cashing restriction, and
• have a TSB of more than the $3 million cap or will approach the cap amount within a relatively short period.

This group has little flexibility to reduce their TSB below the $3 million threshold and as a general proposition are locked into superannuation by the preservation rules until at least age 60.  Access to superannuation prior to that age is available if certain limited conditions of release are satisfied, such as permanent disability.
It is possible for those under age 60 to make micro changes to their superannuation balances.  However, these changes, such as splitting concessional contributions to their spouse, have a limited impact on the person’s TSB.

Member aged 60 or older?
There is a potential escape hatch for anyone 60 or older If Div 296 happens to become law and the individual wishes to reduce their liability.  The immediate impact of Div 296 is most likely to be on anyone who is at least age 60, has superannuation earnings for the 2025-26 financial year and a TSB on 30 June 2026 of greater than the ‘large superannuation threshold’ of $3 million.
Anyone meeting a condition of release prior to the commencement of Div 296 with unrestricted non-preserved benefits may wish to use the flexibility to withdraw sufficient from the fund and stay below the $3 million cap.  Conditions of release to gain access to benefits may include:

• meeting a condition of release of retirement for superannuation purposes,
• reaching age 65, or
• commencing a transition to retirement income stream (TRIS) from age 60.

However, an individual may require that adjustments occur prior to 30 June 2025 as they may think that the impact of the Div 296 tax can be eliminated for the 2025-26 financial year.  However, the case study above shows that in some cases the Div 296 tax payable will depend on the individual’s TSB on 30 June 2026 and not their adjusted TSB.
Anyone between the ages of 60 and 65 who does not meet a condition of release with a ‘nil’ cashing restriction may wish to commence a transition to retirement income stream (TRIS).  The reason is that the balance of the TRIS is not measured against the individual’s Transfer Balance Cap (TBC) until an individual has retired for superannuation purposes or reached age 65. Irrespective of the individual’s balance in the fund, the whole balance may be used to commence a TRIS and provide them with an income stream of up to 10% of its opening balance for the financial year.  However, care should be taken for those approaching a condition of release with a ‘nil’ cashing restriction such as age 65 because the TRIS then falls into retirement phase and is counted for purposes of the member’s TBC.

One issue that arises with the withdrawal of a pension or lump sum from the fund is answering the question, ‘What will the member do with the amount received if they don’t need it to live on?’  There is no end to the possible answers which could include investing it, buying a new residence, an overseas trip or even putting it under the bed.

Division 296 tax – is it best to move to tax-effective accounting if Div 296 becomes law?

As a general practice, many funds do not use tax effect accounting and the decision to use must be considered on a case by case basis.  As the accounts are not general purpose financial statements then the ultimate decision is up to the fund trustees and the fund’s accountant.  A note in the fund’s accounts should reflect whether tax effect accounting is being used.
There may be consequences for a fund that starts using tax effect accounting if it is not currently being used by the fund.  As a general rule, tax effect accounting recognises the fund’s tax liability assuming that all the assets are disposed of at the end of each financial year.  However, if the assumed disposal of assets results in a loss then it may result in a deferred tax asset.
When Division 296 tax is being considered deferred tax accounting will recognise the tax payable if the asset were sold on 30 June.  This raises a tax liability provision for deferred tax in the fund’s statement of financial position or balance sheet.
For example if the fund owns a property and it is increasing in value then by using tax effect accounting the member balances will be lower at the year-end because of the notional tax calculation.  The member’s total superannuation balance will also be lower and therefore the Division 296 tax would be expected to be lower too.
However, while at first blush the use of tax effect accounting may seem attractive the ongoing impact may not be as clear.  This would occur when the asset is disposed of and when capital gains are calculated.  The reason is that the use of tax effect accounting may reduce the member’s total superannuation balance on a year by year basis.
When the asset is eventually disposed of the member’s total superannuation balance would take the capital gain without any reduction for the amount of tax previously taken into account when calculating the member’s total superannuation balance.  The same effect would occur if a member was in accumulation phase and part of that balance was used to commence an income stream.
The ultimate effect by using tax effect accounting is a timing difference.  This would resolve itself when the asset was disposed of or part of the member’s benefit was used to commence an income stream.  The result is that the member’s total superannuation balance would be no different after the sale or commencement of the income stream due to the tax effect adjustment.
Tax effect accounting does not necessarily mean that the member’s Division 296 outcome will be improved.  Whether it is useful may depend on a number of factors based on the member’s particular circumstances.  Don’t forget that if the ATO considers that the purpose of using tax effect accounting to reduce a person’s total superannuation balance and avoid Div 296 tax it may fall foul of Part IVA of the tax law.

What is the current state of the art with Division 296 tax?

As indicated above, the Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023 and the Superannuation (Better Targeted Superannuation Concessions) Imposition Bill were passed by the House of Representatives in October 2024 and introduced in the Senate on 21 October 2024 but lapsed on 21 July 2025 at the end of the previous parliament.  The matter is expected to be reintroduced into the parliament during the Spring 2025 sittings.  The reintroduced bills may differ from the previous bills that lapsed at the end of the previous parliament.