The Australian Government has proposed a new tax on superannuation that could significantly impact high-balance super accounts. Set to begin on 1 July 2025, Division 296 would introduce an additional 15% tax on super earnings for balances exceeding $3 million.
While most Australians support a fair and sustainable superannuation system, this proposed tax has raised concerns among financial advisers and super fund members alike.
How the Tax Would Work
The Division 296 tax would apply an extra 15% levy on your super fund's 'earnings' – but only on the portion of your balance that exceeds $3 million.
Here's where it gets complicated: the government's definition of 'earnings' isn't just the profits you've actually made and banked. Instead, it includes any increase in your super balance over the year, including unrealised gains on assets you haven't sold yet.
Two Major Concerns
1. Taxing Unrealised Gains
The most controversial aspect of this tax is that it applies to 'paper gains' – increases in asset values that you haven't actually realised by selling.
Why this matters:
2. Cash Flow Challenges
Another significant issue is the practical problem of paying the tax. Since the tax applies to unrealised gains, you or your super fund might not have sufficient cash available to meet the tax obligation.
This could force you to sell assets you weren't planning to sell, potentially at an unfavourable time or market conditions, simply to pay the tax bill.
3. No Inflation Adjustment
The $3 million threshold sounds substantial today, but it won't be adjusted for inflation. This means that over time, more Australians will find themselves subject to this tax as the real value of the threshold erodes.
For young workers just starting their careers, this is particularly concerning – they may well face this tax in their retirement years, even with modest super contributions, due to decades of inflation and compound growth.
Important Considerations
It's crucial to remember that Division 296 has not yet been passed into law. The proposal is still working its way through the legislative process, and changes could be made before it becomes final.
Given this uncertainty, making hasty decisions – such as withdrawing money from super to avoid the potential tax – may be premature and could negatively impact your long-term retirement planning.
Getting Professional Advice
The proposed Division 296 tax introduces complex considerations that could significantly impact your retirement planning strategy. The interplay between unrealised gains, cash flow management, and long-term super planning requires careful analysis of your individual circumstances.
If you're concerned about how this proposed tax might affect your superannuation, we recommend speaking with a qualified financial adviser. They can help you understand the potential implications for your specific situation and explore strategies to optimise your superannuation within the current and proposed regulatory framework.
Contact us today to discuss how these proposed changes might impact your retirement savings and what steps you can take to protect your financial future
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