The total super balance integrity measure is shaping up as the main area of contention in the reshaped Division 296 $3 million super tax, with its “higher of two balances” approach under fire.
Under the original draft of the measures – the version that would have seen unrealised gains included in the tax – the TSB at the beginning of a financial year essentially acted as a reference amount, with the TSB at the end of that financial year then used as a comparison when calculating the tax.
However, under the new draft legislation released just before Christmas, the TSB that is used as the reference amount is “either an individual’s TSB at the end of the year or an individual’s TSB just before the start of the year, whichever is greater”.
“This approach acts as an integrity measure to ensure the liability for Division 296 tax cannot be avoided by reducing the TSB prior to the end of the income year,” the bill’s explanatory materials said.
The rationale is that if a TSB has decreased or does not exist at the end of the income year, a member could avoid paying the tax.
“This could, for example, include situations where: superannuation balances are drawn down during the retirement phase; a person dies during the year, and their superannuation has been distributed as death benefits to beneficiaries or their deceased estate,” the EM said.
According to the Institute of Financial Professionals Australia (IFPA), the current framework risks taxing Australians on “notional balances and historical gains that were never intended to be captured”.
In its submission to the draft bill, the IFPA said using the “higher of two balances” approach undermines the fairness of the measure.
“Under the current proposal, individuals can be taxed based on an opening balance that no longer exists,” said IFPA head of technical services Natasha Panagis.
“If a member’s super falls below $3 million during the year because of market movements or withdrawals, they can still receive a Division 296 liability based on their higher starting figure. Taxing based on historical balances rather than a person’s actual position is fundamentally unfair.”
Instead, Panagis said, there should be a modified closing balance test.
“A closing balance approach reflects reality. It ensures Division 296 only applies to members who actually hold more than $3 million in super benefits at year-end and not to members whose account balances drop below $3 million by year end – for example due to investment losses like those that occurred due to the collapse of First Guardian or Shield or during the GFC,” she said.
The IFPA’s concerns are in line with those of the SMSF Association, which said there will be various situations in which the proposed use of the greater of the TSB opening and closing values will potentially create unintended consequences.
“For example, members suffering losses outside of their control, such as occurred with Shield and First Guardian, would have their Div 296 tax liability calculated based on balances which have simply disappeared,” it stated.
“In addition, post 1 July 2027, an individual who has a temporary spike in their TSB at the ‘wrong’ time, such as toward the end of the financial year, will potentially be penalised for that twice – in the year in which the spike occurs and the following year.”
Beyond the TSB integrity measures, the IFPA also said the death-related outcomes within the draft bill are “unworkable and inequitable”, with Div 296 still applying in the year a member dies, even after superannuation benefits have been distributed.
“This creates a real risk of tax bills landing months after death, when estates have been finalised and executors no longer have access to assets,” Panagis said.
“Members must be excluded from Division 296 in the year they die. Anything else can result in unworkable and deeply unfair outcomes.”
