There are reports in the financial press today of panic selling of SMSF assets in light of Div 296. This is totally unnecessary. Let’s look at the facts.
The measure is not law, but I believe it will become so, with a commencement date of 1 July 2025 so let’s assume it is.
Super is the most tax effective structure we have and, for members with $3m, or less, in super it remains so. These members will not be affected at the moment and may never be. This did not stop my doctor’s wife from transferring her $2m balance out of the fund – and losing her SMSF pension – because, when added to her husband’s balance “it would take them over the $3m limit and expose the whole fund to an extra 15% tax”. This is absurd. The cap is on a per member basis and the extra 15% tax is only applicable to “earnings” attributable to balances in excess of $3m. Unfortunately, it’s too late to fix her situation now. They have been victims of misinformation and half-truths. Some of these have emanated from our own sector, promoted by well meaning, but mathematically challenged, professionals.
There will be individuals who will achieve a better tax outcome by reducing their super balance to $3m but they don’t need to do it in haste. And there are many who will be best served by making no change at all. There is plenty of time to consider what the legislation ultimately becomes before making a decision. Any panic to meet the 30 June 2025 “deadline” is due to confusion regarding the significance of the definition of earnings. Let’s look at this.
Earnings = Adjusted TSB at end of financial year – TSB at start of financial year
Adjusted TSB at end of financial year = the member’s TSB at the end of the financial year plus Withdrawals less Contributions
So, let’s take look at John. He has $10m in super now. He doesn’t really have time to do a proper analysis as he doesn’t know what the final legislation will be but “knows” he has to do something before 30 June 2025. Let’s have a chat to John and soothe his frayed nerves. He wants to know what the delay will cost him if he doesn’t take action now but if, in June 2026, he decides that he wants to reduce his super balance to $3m after all.
Let’s assume his account has increased in value by $1m during the 2025/2026 year so, to reduce it to $3m before 30 June 2026, he will need to withdraw $8m. He hasn’t made any contributions. What are his earnings?
Earnings = $3m + $8m – $10m = $1m
Does this mean his tax bill is $150k? No, because there is another part to the calculation.
Only a proportion of the Earnings is taxable.
Proportion of earnings = (TSB at end of financial year – large balance threshold) ÷ TSB at end of financial year
= ($3m-$3m)/$3m = 0%.
So, delaying his decision for a year hasn’t cost Jack any extra tax at all. It has, however, allowed him to enjoy his super tax concessions for another year
What if he decided to leave his super as is. He would pay the Div 296 tax as his proportion would not be 0%.
The proportion would be ($11m-$3m)/$11m = 72.73%. So, tax would be 72.73% of $1m at 15% = $109,095
There is no need to panic!
A more comprehensive assessment, including a calculator, is available on our website and will be updated as matters develop.
