With the proposed changes to the $3m cap to super, we are fielding a lot of questions on this. We wanted to share some important information regarding the proposed as recently outlined by the Australian Labor Government. These changes, referred to as the Division 296 tax, are designed to increase tax on higher superannuation balances and may have implications for those with large or volatile investments within their super.

How the Division 296 Tax Works:

• From 1 July 2025 (or potentially 1 July 2026 if deferred), super balances exceeding $3 million will be subject to an additional tax of 15%, bringing the total tax rate to 30% on earnings above this threshold.
• This tax applies to both realised and unrealised capital gains. This means that even if an investment temporarily rises in value at the end of a financial year, the additional tax will still apply—regardless of whether the asset is sold.

Example of how the tax applies:

To illustrate how this tax works, let's consider the following example:

• If your super balance grows from $3.5 million to $4 million during the financial year, the increase of $500,000 is considered growth.
• Division 296 tax is only applied to the proportion of your balance over $3 million. In this case, 25% of the growth ($125,000) is taxed at the additional 15% rate.
• This results in a tax liability of $18,750 for that financial year, even if the investment value declines the following year.
• If the value drops back to $3.5 million, there is no refund on the $18,750 paid—only the ability to offset future Division 296 taxes.

This example highlights the importance of understanding how volatile investments might trigger significant tax liabilities, even if their values fluctuate over time.

The Dilemma of Withdrawal vs. Capital Gains Tax:

• While withdrawing assets from super could reduce exposure to the Division 296 tax, doing so may trigger capital gains tax (CGT) if the assets are sold or transferred.
• CGT would apply to the entire growth of the asset since its purchase—not just recent gains.
• This creates a strategic decision: would it be more tax-efficient to leave the assets in super and pay the Division 296 tax or withdraw them and face CGT?

Things to Consider:

1. Timing: If the legislation is passed, there is still time until 30 June 2026 to make decisions around reducing super balances if needed. Rushing out immediately may not be necessary.‍
2. Tax Efficiency: In many cases, even with the new tax, it may still be more tax-effective to keep assets in super, especially if the alternative triggers significant CGT or higher income tax outside of super.‍
3. Strategic Planning: We can work together to model different scenarios and assess the best course of action to optimize tax outcomes.

If you would like to discuss how these changes may impact your superannuation strategy or explore the most tax-efficient options available, please feel free to contact Market Partners. We are here to help you navigate these changes with confidence and clarity.

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