Superannuation update: Proposed $3 Million Superannuation Cap (3 October 2023)

From 1 July 2025, the Government has proposed an ‘additional’ tax of 15% on earnings on an individual's superannuation benefits over $3 million at the end of a financial year. This 'additional' tax is to be known as Division 296 tax. We have summarised below the key points of the newly released draft legislation, which is open for comments until 18 October 2023, and therefore subject to change.

Impacted members

• Individuals with a total superannuation balance (TSB) across all superannuation accounts held by the member that exceed $3 million
• Accordingly, a couple can still have up to $6 million in superannuation before being impacted (provided an equal split with no one member exceeding $3 million)
  
• Defined benefit interests will be included within this measure, however specific rules will apply as to how the tax is calculated and payable.

For the purpose of the proposed Division 296 tax an individual's TSB will specifically exclude:

• Limited recourse borrowing arrangements (LRBA) which are otherwise included in a TSB;
• In-transit rollovers;
• Interest in a foreign superannuation fund; 
• Receipt of a superannuation income stream because of death of another person.

This list is not exhaustive.

What is the method of calculating the tax liability?

• For members with a TSB over $3 million at the end of a financial year, a 15% tax is proposed to be levied on the movement between the member’s opening and closing total balances for the year (after adjusting for withdrawals, contributions and other specific exclusions listed above). This movement is referred to as the 'earnings' amount
• The mechanism further ensures that the additional tax is only calculated on the proportion of assets over the $3 million balance
• The calculation method as proposed is as follows:

Step 1: Calculation of Earnings

Earnings = (TSB current financial year + Withdrawals – Net Contributions) – TSB previous financial year

Step 2: Calculate the proportion of earnings attributable to balances above $3 million

Proportion of Earnings = (TSB current financial year - $3 million) / TSB current financial year

Step 3: Calculate tax liability

Tax Liability = 15% x Earnings x Proportion of Earnings

What are the concerns?

• Given a member’s total superannuation balance includes unrealised gains or losses, this will mean that, in effect, the 15% tax will also be calculated on movements in unrealised asset valuations during a relevant year. This may cause cash flow problems as tax has to be funded on assets that are yet to realise their value.
• Where there are negative earnings during a financial year, this loss will be carried forward to be offset against future 'earnings'. There is currently no mechanism to carry back a negative earnings amount where in one financial year there is an unrealised gain and a future year there is a loss.
• There is no mechanism for the $3 million threshold to be indexed.
  

Practicalities

• Tax will be levied to the individual member not the superannuation fund. Essentially the ATO will issue an assessment to the member personally to levy this additional 15% tax. The individual member will then be able to elect whether to settle this additional tax personally or withdraw it from their superannuation fund. Members with multiple funds can also choose the fund from which the tax is to be released.
• This is a 'soft cap', meaning there will be no limit on the size of a member’s total superannuation balance and therefore the member will not be required to 'cash out' excess balances above $3 million.
• As noted earlier, there are specific rules in relation to how Division 296 tax is calculated in respect of defined benefit interests. For those impacted, we can provide further specific information on how it will apply to you.

How we can help

Health Check

• Free review of member accounts to determine impact and options available based on:

– The member’s age and ability to withdraw or make contributions to superannuation;

– The fund’s current asset mix to determine how this proposal will impact cash flow.

Planning and Advice

• Strategic planning to manage the impact of the $3 million superannuation cap.
• Re-balancing of member accounts based on an individual’s eligible contribution caps.
• Consideration of segregating high growth assets for accounting purposes.
• Estate planning opportunities.