A new chapter begins
By the numbers – explaining the proposed $3m super tax
Government plans to increase taxes on people who have more than $3 million in superannuation have come under fire in some quarters, but few people are likely to feel its effects.
For such a bland-sounding name, the proposed Division 296 tax changes are creating a lot of headlines.
Media reports on the reforms – so named for the section of tax legislation to which it relates – have outlined the Australian Government’s push to increase the tax on superannuation accounts with balances of more than $3 million from 15% to an effective rate of up to 30% on some earnings. The bill, first introduced to Parliament in late 2023, has not yet passed.
Some analysts have taken aim at Division 296, especially a bid to tax unrealised capital gains, while others believe the legislation could hamper investors’ efforts to leave a healthy inheritance for their children.
A philosophical debate
So, what is the real situation?
Anthony Williams, Technical Services Manager at Mercer Financial Advice, says the Division 296 debate has frequently been based on some miscalculations and misunderstandings. Significantly, he points out that under Division 296 only the proportion of earnings linked to amounts over $3 million would be taxed. This reduces the tax far below 15% of the total earnings amount.
A question often asked within the debate over this new tax, is whether super now becomes less useful for people with balances over $3 million. But if money is withdrawn from super and invested elsewhere, then other taxes will apply on those investments. Personal income tax can range up to 47% of the earnings, which is a higher figure than charged, even with the introduction of this new tax in superannuation.
“Many people who will be affected by Division 296, depending on their personal taxation and investments, are probably still going to be better off with superannuation than any other tax structure available to them,” he says.
The discussion raises important philosophical questions about the role of superannuation in Australia, according to Williams. When the Keating Government introduced the Superannuation Guarantee system in 1992, it was not intended to be a vehicle for families to accumulate wealth and pass it on to their children as an inheritance. Rather, the aim was to help Australians grow their wealth over time so they could retire comfortably while reducing the nation’s future reliance on the Age Pension.
“We've moved away, for better or worse, from the original system that was imagined,” Williams says.
Who will be affected?
It is important to note that Treasurer Jim Chalmers estimates that fewer than 0.5% of all Australians – or about 80,000 individuals – will be subject to the 30% tax rate if Division 296 passes because 99.5% of people have a super balance below $3 million.
Williams notes that there has been some analysis pointing out that a 20-year-old worker today who earns average weekly earnings, plus a Superannuation Guarantee of 12%, over their course of their career is likely to accumulate more than $3 million in super by the time they turn 64. However, he says such a scenario does not factor in the likelihood of future governments making iterative changes to tax and superannuation policies.
“Governments make changes to tax thresholds as necessary and, at some point over the next 20 years, this Division 296 provision in its entirety, or at the very least the threshold, is extremely likely to change,” he says.
That is not to say that no one will be affected by Division 296. Financial advisers have suggested that the likely new tax should prompt estate planning and trustee succession advice, especially for self-managed superannuation fund (SMSF) members who choose to retain high balances inside their fund.
The Government’s motivations
Why is the Australian Government pursuing this Division 296 legislation? In short, it believes the reforms will rebalance tax concessions in superannuation, targeting ultra‑high balances and improving fairness across the system.
The move should also help raise government revenue, while it is also likely to discourage super from being used chiefly for intergenerational wealth accumulation, rather than income replacement in retirement.
Williams adds that the current Australian Government is also taking steps towards more ‘progressive’ taxation – that is, ensuring that people with more wealth and more income should pay more tax out of the super system, even though it offers concession tax advantages. “Progressive taxation is viewed by most developed economies to be a fairer way to distribute the cost of running society and running government,” Williams says.
Calculating Division 296
As stated, only the investment growth will be taxed under Division 296 if it comes into force.
Williams cites a scenario that explains why most people, even if they have more than $3 million in super, will face only a modest impost. Imagine if a person starts the financial year with exactly $3 million in super and then, over the course of the year, they increase their balance by $100,000. Some fear that applying the typical super tax rate of 15% would leave them with an extra $15,000 tax bill. That is not the case.
Williams notes that when earnings are generated, the 15% tax only applies to the proportion over $3 million. Roughly, he says, in this scenario that will equate to a tax of about 3.2% being applied to the $3.1 million total. This equates to about $3200. Then you apply the 15% tax only to the $3000, resulting in a tax of about $484.
“So, for that individual generating $100,000 and paying $484 on it, the tax as a percentage of their earnings is very, very low,” Williams says.
For those with $10 million, $20 million or more in super, Williams says the equation will obviously change, but that on the whole most people should not be overly fearful of a big tax hike.
Act early, seek advice
If passed, as expected, there is no doubt that Division 296 marks a significant shift in taxation for high super balances as the Australian Government pursues tax fairness and higher revenue streams. For investors, a proactive planning approach will be the key if they fall under the new rules.
That means consulting carefully with financial and tax advisers so that you understand the likely impact of Division 296 and develop a strategy to mitigate any potential negatives.