Division 296: What to consider before 30 June?

Division 296 has sparked plenty of debate – but for most Australians, the practical implications are less dramatic than the headlines suggest.

While the proposed tax introduces new thresholds and a more complex way of measuring super balances, the core question for affected investors isn’t whether super is still worthwhile – it’s how (and whether) their strategy should adapt.

In this interview, Meg Heffron unpacks the key mechanics of Division 296, including what’s changed, who is most affected, and what (if anything) you should be doing before 30 June. For many, the answer may be simpler than expected – but there are still important strategic considerations worth understanding.

Transcript

What Division 296 changes were you most surprised about?

There are probably two important changes. And they were both surprising really. So one was the introduction of a second threshold. So it’s not just extra tax for people over 3 million, it’s extra extra tax for people over 10. And the other one, which was much more of a sting in the tail, I think, was now looking at total super balance as the greater of the beginning and end of year balance, which means a lot more people get caught in the net than might otherwise have been. Because I imagine a lot of people, if that hadn’t been the case, probably would have at some point decided to wind down their Super. They’d have sold a lot of assets and then moved money out of super in that same year and escaped Division 296 tax on those capital gains. But they won’t get a chance to do that now.

For those affected by Division 296, what should they be doing before June 30 this year?

Do you know, to be honest, for most people I wouldn’t be doing anything. So for people between say $3 million and $10 million, they’re still at worst paying 30% on income, 20% on capital gains. It’s very hard to replicate that outside super. So whilst Division 296 tax for most people affected, which is going to be the people between $3 and $10 million, it’s going to make them less wealthy for sure, but it’s not necessarily going to make them so much worse off in super that they need to consider non super options. So for most people in that bracket, I would just leave the money right where it is. People who’ve got more than 10 million, I can understand why they might be looking at moving money out of super if they can get a low enough tax rate outside and, you know, maybe they’ve got a little bit more incentive to do something before the 30th of June. But to be honest, even for them, I don’t think there’s a 30 June imperative on removing money from Super.

One interesting thing though that might sort of trigger a bit of action is SMSFs get this choice. Do they opt in to a sort of special cost base for measuring capital gains for Division 296 they have to do that as at the 30th of June and they don’t get a choice over whether they just opt in for assets in a gain position and leave losses alone or they have to opt in for everything. So the one sort of thing that I might do if I was, if I was in this position before 30 June this year is look at offloading lots of my assets in a loss position. If I was, you know, already questioning their value, I’d do that before the 30th of June rather than after so that I can opt in to the CGT, the capital gains release and not have to worry that I’ve unfortunately for my loss assets reset my cost base to a, to a lower point than I actually bought them for.

If your super balance is below 3 million now but may exceed it in the future, what should you consider?

Yeah, look, maybe I think, I mean until they get to $3 million there’s really no need to withdraw even, you know, will they put more money in? They can’t put non-concessional contributions in at the moment anyway. Would they. If you were still working full time and you were paying top marginal rate tax, would you still make maximise concessional contributions? Yes, probably, because the tax break on the contribution amount itself is enough to make it worth putting up with a bit of extra earnings on the amount over $3 million. And like I said before, what else are they going to do with the money? If they’re going to invest it outside super, it’s going to be pretty difficult to get a tax rate that’s way better than Super. So you know, for now, if it were me, I would, I would just keep contributing as, as usual in the ways I can because I can’t make non concessional contributions anyway. I just keep making concessional contributions.

If you do plan to withdraw to get below $3 million, what is a sensible order?

Yeah, probably most importantly, not all at once. So the real challenge with all at once is if you imagine somebody’s got $5 million at the start of the year and they want to withdraw $2 million to get down to $3 million. Well, thanks to the new method beyond 2026, 2027, we’re now going to be looking at balance at the beginning and end. So if your balance at the beginning is $5 million, you know you’re going to be caught for Division 296 if you remove all the assets at once. You’re selling assets, you’re paying capital gains or you’re realising capital gains, they get caught for both fund tax and division 296 tax. Whereas if you sort of staggered that over a year or two and sort of pushed realising the largest gains out until the final year, you’re able to basically get your accumulation balance down which reduces your fund tax and get your overall balance down, which reduces your Division 296 tax. But only possible if you can stagger it over a couple of years at least.

How should people think about assets they expect to heap for the long term, perhaps to their death?

Yeah. So that. So one of the biggest weaknesses of super is that money has to come out at some point. Death at the very least. What I think for a younger person buying an asset they intend to hold for a really long time, probably, you know, still no problem holding it in super. But if you were 65 looking at buying a property, you thought the family probably would want to hang onto this property for good. You might buy that outside super rather than inside super because you can die and the asset passes on to your estate or your children. If it’s held outside super and they don’t have to pay any capital gains tax at that point, they will have to pay more when they eventually sell it, but they don’t have to pay any at that point. Whereas super triggers a capital gains tax event when the money’s or when the asset’s transferred out. So you’ll be definitely paying capital gains tax if you hold it in Super.

If someone does invest outside super, how do people typically structure that and what should they watch out for?

Yeah, well, the most important thing to watch out for to begin with is tax rate. You know, if they’re going to take the money out of super because they’re frightened of Division 296, they better hope they can lock it into a better tax rate than they’re getting in Super. Or, or they’re doing it for some reason completely unrelated to Division 296 tax. Like I want to wind down because I’m older and I don’t want my children paying death taxes. But if they’re going to move it out, then I think a lot, I think we’ll probably see a lot more people using a family trust structure. Maybe the corporate beneficiary will make a return to popularity. There’s certainly a lot of talk about investment bonds, mainly because they can trap the income at a 30% tax rate.

So yeah, I think we’ll probably see a lot more exploration of non super assets if only because this whole conversation about Division 296 has made people talk more about the real cost of death taxes. And so I hope we’ll actually have more of an evolution towards people getting to an age where it’s just normal to start winding down Your super, you don’t hang onto it to the last possible moment. You just say, well, super is great for me during my working lifetime and for the first 15 years or 20 years after retirement. And then there comes a point where I naturally start to draw it down.

What should members be watching out for in coming years as this plays out?

Yeah, well, probably a couple of things on Division 296. I think this, this mechanism for choosing between the, or not choosing, using the higher of the start of year and end of year balance, I think that will trip us up because people will think to themselves, okay, now’s the time for me to wind down my Super. I’m going to take a lot of it out. Oh yes, I haven’t got any left at the end of the year. I shouldn’t have Division 296 tax only to discover that there’s a bill because they started with more than $5 million and they’ve realised a lot of capital gains this year as they were, as they were winding up their fund. I think the other time people will probably be caught out is around death because whilst, you know, people who have a lot in super will get a Division 296 tax bill in that year of death. And that’s also often a time when you’re realising capital gains. So the bills could be bigger than they’re used to getting or that their family are used to getting. The bill will go to the estate and the money, the super money may well have gone somewhere else.

You’re thinking your classic blended family. The super money goes to the new spouse, but the Division 296 tax bill goes to goes to the estate. I think we’ll also see some hairy situations around divorce. I was playing around with a few calculations the other day and working out if you got divorced and one spouse leaves the fund, how badly could you mess with them by, you know, selling a lot of assets after they’ve left the fund? I think we’ll have some interesting cases around that.