Division 296 Revisited | talkBIG podcast | Season 3 Episode 15

Introduction

Andrew Sykes (00:04)

What if your superannuation, the nest egg you've been building up for decades, suddenly became subject to a tax on money you haven't earned yet. That was really proposed under Division 296 earlier this year and it caused a huge stir throughout the financial community. In a previous episode of talkBIG, we explored the initial proposal, a 15% tax on earnings for individuals with super balances over $3m, including unrealised gains. That episode raised important questions about fairness, liquidity and the long-term impact on retirement savings. But now the government has backtracked, and the rules have changed again. Is this a fairer system or have we just moved to a more complicated one? And what does it mean for your retirement strategy. Today, we're going to have a look at the new rules, explore who's affected and share practical advice on how to prepare before the July 2026 start date. 

Hello, I'm Andrew Sykes. I've been a business accountant for over 30 years. I talk about business, money and the economy to help you get ahead. Welcome to talkBIG. 

Joining me today, I have one of our leading superannuation experts, partner Katie Timms, who's our National Director of Superannuation and Self-Managed Fund Services at RSM Australia and also leads our Superannuation Committee. G'day, Katie, how are you?

Katie Timms (01:33)

I'm really good, Andrew. Thanks for having me.

Andrew Sykes (01:35)

Well, good to catch up again and we thought it was all settled last time we caught up. I think one thing we've learned over years and years of practice, uncertainty around super.

Katie Timms (01:47)

Absolutely, but I will tell you this is probably the most excited or happy the industry's been about a change in superannuation. Normally we get a bit frustrated with the constant tinkering. This one, I think most of industry pretty much celebrated when these changes were announced.

Andrew Sykes (02:01)

Is that because it's simpler than the initial ones? And maybe if you could just briefly remind us where were we at last time we spoke?

Katie Timms (02:10)

Yeah, absolutely. Last time we spoke, we were in a bit of a world of pain and uncertainty. So, we had uncertainty in that space as well. What we were facing then was really a system that was designed, as Treasury said, for simplicity, not equity. So, what they were trying to do was to make sure that people with really high superannuation balances, so more than $3m were not unfairly gaining tax concessions.

What they were wanting to introduce was an extra 15% tax on earnings. But the way they designed it is that they thought, well, rather than have to actually determine how much income everyone is generating in their superannuation, we're just going to say how much has your member balance changed in a twelve-month period. So, as you said, that meant taxing unrealised gains, which was something that was unheard of in the Australian tax system. So that's where we were. Horrible proposal for a lot of people, really unfair.

Key changes to Division 296

People with fluctuating asset values were going to be really unfairly targeted.

Andrew Sykes (03:07)

Yeah, and it did seem unnecessarily complex, and it would have made us the only jurisdiction in the world to tax unrealised gains, wouldn't it?

Katie Timms (03:17)

Absolutely it would have. There was previously a tax proposed in the US to do something similar which did not get anywhere, which isn't really a surprise. So, it would have made us, you’re right, one of the few tax systems in the world that was starting to tax people on money they'd never even made.

Andrew Sykes (03:32)

Yeah, and that is very problematic because until you actually realise an asset, you're very uncertain as to the gain.

Katie Timms (03:39)

Absolutely. Just because an asset goes up in value doesn't mean that that money is always going to be there for you. It may go down again in two years’ time. But to tax you at the time just because the value's increased, absolute insanity. It was probably the most frustrating two years I've ever spent in the Australian tax system.

Andrew Sykes (03:55)

And I agree with that because we get a stack of queries and a lot of concern from people, even people who weren't going to be affected with the view that, it started there, it's going to trickle down. So, we went through that, we went through a very uncertain period of time, and then we get new legislation in October of this year. What are the key changes to Division 296 in that legislation?

Katie Timms (04:20)

Yes, so in this instance, it seems like lobbying actually paid off. So, we saw a few key changes. Number one, they did agree to index that cap. So previously, was sort of deemed that it would be it's $3m regardless of the impact of inflation and things. That's the cap, and we're going to stick to that. They have changed that. So, the indexation will automatically occur to CPI in increments of $150,000.

The big change we got though, obviously the big one we were fighting for was they've moved away from this concept of taxing unrealised gains. So, they've said, look, instead of taxing you on market movements, we're gonna let your super funds report to the tax office what income your member account has actually generated. And then the ATO will do the tax calculations and apply it from there. So, it means instead of taxing these fluctuations in asset values,

The super funds will say, this is what your member account earned in actual income, and they will tax you on that. Now, the other thing they did bring in though was a second cap. So, we've still got the first cap. So, for people with a balance over $3m, they will pay an additional 15% tax on the proportion that exceeds $3m. So, it's a little bit of a complicated calculation. But for people that have a balance of over $10m in superannuation, they will pay an extra 10% tax on top of the 15% that they'll already be paying. So that's sort of their way of trying to make sure that they're capturing as much revenue as they initially hoped they would.

The tiers of tax with Division 296

Andrew Sykes (05:51)

Okay, so just to make sure we're clear on that. So, we're now going to have a tiered system within superannuation, and we have a tiered system in personal tax. So, it's a very similar concept. So, first tier up to three million will pay how much?

Katie Timms (06:07)

So first here, up to $3m will not pay any Division 296 tax. Those people would just pay normal tax in superannuation, however they normally would. Once you get over $3m, so between $3m and $10m, you will pay an extra 15% tax on earnings on the proportion that's over $3m. And then at $10 million, you'll pay another 10% on top. So, 25% on the earnings.

Andrew Sykes (06:34)

Okay, so if I'm running my self-managed super fund, I've got to say about $1.5m, I'm in pension phase, no implications at all.

Katie Timms (06:41)

No issues for you. You will just tick along as you were before.

Andrew Sykes (06:45)

Even in accumulation phase, I'm going to be paying 15% tax up to the $3m. Once I get over there over that 3 million, that proportion over the $3m will attract another 15%. So, any balances over that, it'll be proportional over the $3m will be 30 cents in the dollar. And then there's a $10m as well.

Katie Timms (07:06)

Yeah, that's right. And that proportion is a really important part of determining how this tax is going to impact you. Because if you're only just over $3m, let's say that you're $3.1m. We are only $100,000 over $3m, so your proportion is going to be really, really small. It's as you get to the higher balances that this tax starts to become a little bit more impactful.

Andrew Sykes (07:30)

Yeah. And look, that is a really, really important point that I think we should emphasise because that's probably the biggest query or most queries I get is, my whole group is going to be taxed at 30%. It's not you'll pay 15% tax up to $3m. And then if you earn, as you say, you know, that extra hundred thousand you'll pay, you might earn 6% or 7% on that, six thousand, seven thousand dollars, and you will pay 30% tax on that. So, it's going to be an impact.

But not a huge impact. Yeah. So, who's most likely to be impacted by this, Katie?

Katie Timms (07:58)

But nowhere near as much. That's right.

Look, well, it's actually really interesting you say that. So, there's probably a few people impacted. The tax system now that we're going to have with superannuation up until $10m is still probably the most concessionally taxed environment to hold your assets. Because of the way the pension system works with superannuation balances. So, when you're in pension phase, you pay 0% tax. That's a lovely tax place to be.

So that might mean that you're only paying Division 296 tax if your balance is over $3m. The impact is going to come for people the higher their balances get; they're the ones that are going to start to see the impact of this tax coming in. The biggest impact on this is actually going to be, we don't want to say poor me, but on the administrators and on the APRA and retail funds, because there's a reason why the government didn't go with this system in the first place.

It's because the APRA systems aren't designed to be able to report in this manner. And so, we're really interested to see how that's going to play out long term because administratively, we don't really know how they're actually going to manage this. And we're six months away from it kicking off.

Impact on self-managed super funds

Andrew Sykes (09:09)

Yeah, and historically, would it be correct to say that when we have seen complex changes, increased administration costs have passed on to the members just to meet administration needs.

Katie Timms (09:21)

Absolutely. So, you I know that the software providers for SMSF land are already, you know, in the background going, okay, well, we need to redevelop this. That's going to be increased software costs, you know, that are going to be passed on. The ATO is actually going to require the superfund to report to them the information they need. Now, this is a different calculation than it is to normal tax returns. So, we're not just going to be able to pull the data straight out of there. So, there's going to be another, you know, tax reporting impost

for the accountants, for superannuation funds. And that is going to, unfortunately, going to come at an extra cost for the individuals.

Andrew Sykes (09:56)

It has to be paid by the members, which is unfortunate. So, if we look at that capital gain, so we've moved away from the concept of unrealised capital gains, how are capital gains now going to be taxed? ⁓

Katie Timms (10:08)

This is probably the really big uncertainty we've got because we are, you know, we're all desperately, it's a bit sad, but all of us in the super community are, you know, checking the treasury reports every day. We're waiting for that final legislation to come out. So, Jim Chalmers has made a couple of announcements to suggest that there would be some form of capital gains tax relief applied if you were going to be impacted by this tax. What we're missing is a little bit of the detail. 

So, we don't really know, does that mean that we're just going to reset balances at 30 June 2026? So, you know, if you sell an asset after that date, well, your new cost base is going to be the balance on 30 June 2026. Are they only going to apply that relief for Division 296 tax purposes? And so, what I mean there is that, you know, you've got a cost base that you've purchased the asset for in the superannuation fund. They might say, well, we don't want you to have to pay this extra new tax on assets that you might have owned for 10 years, but you still have to pay according to the old CGT regime for income tax purposes. So, we might then now be running two separate cost spaces, you know, for different tax systems. So, we are really desperately waiting to see what that's going to look like.

Andrew Sykes (11:19)

Yeah, it looks like we're doing another podcast in March or April as more rules come out. So, CGT, we're pretty certain and comfortable. We're going to enter into that new tiered tax regime. 15% up to $3m, 30% on earnings on balances over $3m, and then another 10%. So, 40% on earnings over the $10m mark.

CGT will put it down as we're starting to get some guidance, but we need to circle back and make sure it's right early next year or when the government makes it clear.

Katie Timms (11:50)

Yeah.

So, we were told they were intending because they're really keen to get this through. So, we were told that legislation would be released before Christmas. So, we don't have a lot of days left for that, you know, for that to come out. And they've really left this with a really short consultation period. So, from what we've heard, they want this passed by March, because it does come into effect by

1 July 2026. So somewhere between now and March, there's going to be a lot of work being done. There's going to be people who are thinking about what they need to do to get themselves ready for this and any decisions they might need to make in advance.

Andrew Sykes (12:26)

Yeah, and to be fair, it’s not a lot of time between March and 30 June.

Katie Timms (12:32)

It is not a lot of time at all. it's what's really interesting is that when they first announced Division 296 tax, in February 2023, I mean that's how long this has been discussed. They were really clear when they released that, that they needed a lot of time to implement because they wanted to give people at least two years to get their affairs in order. Now, obviously we're going to be looking at a three-month deadline to get our affairs in order, which is very, very different from what we have. But look, I want to be really clear.

These are really positive changes that have come out. We are not unhappy with the announcements. We just are desperate to see the details so people can actually make plans.

Andrew Sykes (13:09)

So, on balance, you would say we have a simpler regime. There's just a little bit of uncertainty left. I hope you don't have any leave booked for the first six months of next year. It's going to be interesting.

Katie Timms (13:23)

It is going to be a tough run. I mean, at least for a lot of people, at least when we got these announcements, it was like, okay, we actually understand now where we're going. So, we can make concrete decisions. You know, we've sort of been spending the last nine months waiting to see what the government was going to do. You know, they announced after the election they were intending to push through with this. You know, it was going to be a big revenue raiser for them. And then it didn't get through parliament. And then it just kind of got

dropped and sat there and we were all sitting in this uncertain land. So, it's going to be a busy time. There's going to have to be decisions made in a short period of time, but at least we are moving into a regime that is better.

The impact of Division 296 on specific groups

Andrew Sykes (14:01)

Yeah, okay. So, for most people, this is not gonna have a massive impact. But always when we have a big group like this, there's gonna be some outliers there. Are there any groups that we think might be unexpectedly affected by this or harshly impacted by it?

Katie Timms (14:18)

Look, some of that is going to depend on how they frame this capital gains tax relief. So that's going to be one, if they do it in a fair manner, that's going to erase a lot of the complication and complexity. For those, however, moving forward who are going to be impacted, so one area where people need to kind of understand is that maybe they're going to be under $3m now, but if there's a husband and wife and there's an intention for the benefits to pass to the other, two people with $2m

all of a sudden becomes $4m, then they're going to drop into the regime. So really understanding when that timing is going to hit people. For those people that also that love a speculative investment. People that maybe are not going to have the CGT relief this year, but in a few years,’ time have got those investments that have massive gains, may find themselves impacted by this in a higher tax environment that they were initially intending.

Andrew Sykes (15:07)

Yeah, so what are the practical challenges for some of our self-managed superfund clients, in particular those with illiquid investments like property and like farms, for example? Do you see more of an impact there?

Katie Timms (15:22)

Absolutely. Look, farmers have been the hottest topic of conversation from the start, from when this tax first came in, because we've seen really big value fluctuations over a long period of time and farms aren't assets that we necessarily just sell. These are family investments. These are intergenerational. So just because something maybe makes a capital gain or a profit on a transfer to the next generation, doesn't necessarily mean that we've got lots of cash floating around to be paying this tax.

Look, I will say these changes are absolutely of benefit to those farmers in that. But I think what we're starting to see is really the question around a lot better succession planning for farms that are sitting inside of super. What's the point where we really want to look to start to transfer that? It's been positive in that it's generated a lot of conversation around what's the plan. How long do we want to keep it in here? knowing we've got this new tax, knowing

We've still got death benefits tax that's floating around. So, from that perspective, that's been a positive.

Andrew Sykes (16:21)

Yeah, and it's a really difficult one because a farm's an unusual capital gain because you need the farm to earn the income. You can't keep on selling parts of the farm to pay tax. It's a very, very difficult one, particularly for intergenerational. 

Preparing for Division 296 in the New Year

Now, are you starting to formulate any strategies or what should people be doing now to plan ahead of 1 July 2026?

Katie Timms (16:45)

Look, I’ve told everyone we're not doing anything till at least the new year, because I really want to get a good look at this legislation and this capital gains tax relief because to me, that is the key to a lot of the decisions that will be made. There will be probably a lot of conversation for people around looking, starting to look at how they're going to value their assets on 30 June 2026. That's going to become a really key date for CGT relief to determine, you know, what is your opening balance when this tax kicks in, all that sort of thing. 

So, I'm saying to people, please, I know I've been saying this for two years, please let's be patient, we just need to wait a little bit longer. Once we've got the detail onto that CGT relief, we're going to have a really good idea for, okay, what do we need to be doing in the next financial year?

Andrew Sykes (17:28)

Yeah, thanks, Katie. So, this is a major policy shift still, even though it's simpler, it's still a major policy shift. 

The future of superannuation policy

Is this signaling a different direction with super over the next few years? Are we going to get more change? We've been at that period where super changed every year and then it's settled down for quite a while. Do you think there's a lot more coming down the pipeline to us?

Katie Timms (17:51)

I think there will be more coming down the pipeline. I have always said, and I stand by this, the changes that were made in the 2016-17 year, which brought in the pension caps and changed a lot of the rules, were some of the biggest changes we'd seen, but were probably some of the smartest. Because they were putting in place things that were going to make things smoother for the long term. It was really a long-term strategy. What we've seen now is a reaction to, well, that's taking a bit longer to generate the revenue than we'd hoped.

Having said that as well, based on the reactive nature of this legislation, I think we're going to see more changes. The Greens, if you've been following, I'm sure everyone's following the super news as closely as I do, but the Greens have started making comments again about how borrowing arrangements inside of super should not be there. It's contributing to the housing crisis, even though there's not a lot of evidence to really suggest that.

There's not a lot of love for those sorts of things. I would be very surprised if they're still with us in five years’ time. I think there's going to be pressure on those. I think we're going to see, though, more pressure on a lot of the taxing concessions that are in superannuation. It is still a great environment. It is still the most concessionally taxed. And unfortunately, we see tinkering for the short-term of really positive long-term strategy.

Wrap up

Andrew Sykes (19:04)

Yeah, and look, I couldn't agree more with anything that you said there. I still think super is a great environment. Though, really make sure you get your own personalised advice before you do anything with your super. I do think these changes mean that the self-managed super funds aren't as passive as they used to be. I think you've got to be very active in your management and your structuring with them. 

If we summarise what you said is that we've got some certainty around now around the income tax and the new tiered structure. And we're not that unhappy with it. And I think a lot of people would be surprised how small the impact is. But stay in touch with your advisor around the capital gains tax because we need that finalised. Katie, that's all we've got time for. Really good update. Absolutely terrific. Thank you for that and sharing your insights. 

To all our listeners, I invite you to download and subscribe to our podcast wherever you get your podcasts from. Thank you for joining us on talkBIG and we will talk to you next time.