Division 296 Tax and implications for TPD

On Tuesday 3 October 2023, the Government released draft legislation for the proposed new tax. What will be known as “Division 296 tax”.

Fundamentally, the Government hasn’t moved from its original proposal with the more controversial elements remaining:

• The mechanism for calculating the “earnings” that will be taxed is based on movement in a member’s “adjusted” total superannuation balance. By default, that will include unrealised capital gains.
• No refunds in years when earnings are negative.
• No indexation of the $3m threshold

The “adjusted” total superannuation balance will consider various contributions and withdrawals. Meaning the “earnings” calculation will not necessarily be the difference between a member’s closing and opening balances.

While not an exhaustive list, withdrawals which will be added back under the above equation is as follows:

• A superannuation benefit payment (pension or lump sum).
• Superannuation benefits transferred via spousal contribution-splitting.
• Superannuation benefits transferred via a family payment split.
• Amounts withheld from an excess untaxed roll-over amount.
• Amounts released under a valid requested release authority.

Contributions on the other hand are amounts which have been added to the member’s account during the year. As such, these are subtracted from the total superannuation balance amount, and include:

• 85% of the concessional contributions made to superannuation.
• Non-concessional contributions.
• Downsizer contributions.
• Contributions-splitting superannuation benefits payments.
• family law superannuation payments made due to a payment split.
• The total superannuation balance value of a superannuation death benefit interest when the individual becomes a retirement phase recipient.
• A death or total and permanent disability (TPD) insurance payment.
• A transfer from a foreign superannuation fund.

While the “contribution” may be excluded in the year end total superannuation balance in the year received, In subsequent years, earnings on these contributions will be taken into account for Division 296 tax. Given death and TPD insurance is likely to be the largest of these, withdrawing these amounts in the same financial year will be the best outcome. Otherwise, the withdrawal, when paid, will be added back and be taken into account for the earnings calculation.

One notable exception from the above list is the receipt of a Structured Settlement. Carving out structured settlements from Division 296 tax, means these payouts are specifically excluded for both the Transfer Balance Cap calculation and Div 296 tax. However, if the payout earns enough over time or other super is added to the structured settlement, it is still possible for these recipients to be subjected to Div 296 tax.

How much of the earnings will be taxed?

No change here. Not all of these earnings will be taxed, just a percentage of them. The taxable proportion is based on how much of a member’s total superannuation balance is over the $3m threshold. This is worked out based exclusively on the member’s balance at the end of each year. 

When and how it’s paid

The tax will be levied on individuals but can be paid from a super fund using the usual release authority mechanism. The same system which is used to release excess contributions or Div 293 tax.

Payment of this tax will generally be due 84 days after the Commissioner issues a notice of assessment for the tax.

Interestingly, a new general interest charge has been introduced should the individual not have the liquidity to pay the tax personally or release the funds from their superannuation fund. This new general interest charge is a lower interest rate as other tax but is not designed to be a deferral of the tax payable.

What next?

Technically this isn’t the end – This is draft legislation and responses have been invited on it. Albeit the timeframe for the responses is short. 15 days. This suggests major changes are not expected by Treasury.

Once Treasury has considered the responses, and tweaked the legislation if required, it will be introduced into Parliament. While the passage through the Lower House is all but assured, with only 9 sitting days for the legislation to be come law, it may not be debated by the Senate until the new year.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.