Super tax backflip will make life easier for financial advisers

Following more than two years of handwringing over how to handle the proposed increase in the tax on earnings for super balances above $3 million, Treasurer Jim Chalmers reversed course on Monday and conceded on essentially every measure that critics had attacked.

Division 296 will go ahead; however it will no longer apply to unrealised gains, and the threshold will be indexed. Chalmers even pushed back the start date to 1 July 2026 so that there is time to make proper plans.

New in the updated tax plan is a second threshold – balances above $10 million won’t just cop the additional 15 per cent, the proportion of earnings above that level will be taxed at 40 per cent.

Charlie Viola, executive chair at Viola Private Wealth, told ifa the move is “very sensible as compared to what was proposed, which was irrational and was going to be very, very hard to administer”.

It also means that advisers can largely just carry on and leave client money in the super environment.

“There would have been a raft of work required to model whether moving it was sensible, so now, we are likely leaving it,” he explained.

“The only caveat is if clients have lower personal marginal tax rates than 30 per cent, we will still consider but that's not been our experience in our client base.”

James O’Reilly, director and financial planner at Northeast Wealth, said it was “extremely relieving” that there has been some level of resolution, despite the “wayward journey” to get here.

“Having spent time working through many of the Productivity Commission submissions, I agree that Australians in the accumulation phase face major headwinds building wealth. These challenges can be starkly contrasted against some concessions the ultra-wealthy continue to enjoy. Reform is needed, and the initial Div 296 proposals fell profoundly short,” O’Reilly told ifa.

“The reshaped legislation is far more sensible. Indexing the $3 million threshold avoids dragging middle-class Australians into the net over time, and scrapping the proposal to tax unrealised gains brings the reform back in line with established tax principles.”

Looking forward, he said the focus for advisers should now shift from dealing with the uncertainty to focusing on execution.

“Our members who were potentially affected by Division 296 are already well briefed and waiting for further clarity. With a definitive 1 July 2026 start date, there’s now enough time for our members – and all Aussies – to adjust their strategies and prepare,” O’Reilly said.

Is the higher tax rate fair?

According to Viola, the new version of the tax will go some way to restoring confidence in super, however he doesn’t believe creating this additional level of taxation is as fair and equitable as the government would argue.

“There is clearly a view that, at this level of funds, the tax concessions available for super, which are intended to incentivise saving for retirement, are no longer needed or fair,” he said.

“I don't completely agree with this, as those with the big super balances have likely been the biggest contributor to tax over their working life – but on the basis that this is the view, the changes to Div 296 just ensures that the additional tax on earnings is applied inside the usual framework we have, which is far more sensible. It will also be much easier to administer and understand.

“There is sociological discussion about whether the additional tax is fair, but that aside, if they want to tax it, fine, just be sensible. This is much more sensible.”

Key to Viola’s position is that for many of the individuals with particularly large balances, it would have been built through non-concessional contributions and Div 296 is “taxing people who have already likely paid greater levels of tax to get the money in there”.

O’Reilly described the additional level of taxation for balances above $10 million as being a “severe shock” for impacted members.

“The proposed 40 per cent tax rate, combined with only a one-third CGT discount, means the effective tax burden now mirrors that of a standard investment company,” he said.

“Given the structural advantages of companies and trusts (continuity after death, control of tax outcomes, flexibility), I suspect that many in this bracket will likely move their excess wealth out of super altogether.”

Relief for farmers is ‘good news’

According to Bryn Evans, private wealth adviser at Integro Private Wealth, no longer taxing unrealised gains is a huge win for Australians that hold with farmland in their super fund, who were set to be disproportionately impacted.

“This significantly changes the impact on those with larger balances, as the increase in asset values even without a sale will no longer incur a tax bill,” Evans said.

“This is good news for those who have chosen to hold assets such as farmland, which will only incur tax on the increase in value if the asset is sold and cash proceeds are available to settle the tax.”

Notably, he added, there is yet to be confirmation that the one-third discount for capital gains on assets held for more than 12 months would still apply.

“Without such a discount, there may still be implications as to the ownership structure of assets such as farmland,” Evans said.

“There will be two thresholds, which will now be indexed in line with the Transfer Balance Cap, and the earnings will be taxed at a higher rate of 30 per cent between $3 million to $10 million and 40 per cent above $10 million.”

He also said it will be “interesting” to see how the government’s consultation process for the new version of Div 296 plays out and how funds deal with the practicalities of determining earnings.

“My view is the main reason for the previous design was the relative ease in calculation by the ATO because many super funds calculate earnings and determine tax obligations at the fund level, not the individual level,” Evans explained.

“Now that members within a fund will be taxed at different rates on earnings, there could be a need for super funds to do more work to implement these changes.”

O’Reilly added that while the new proposal doesn’t answer every question, there’s “sufficient clarity to leave us feeling confident that the final legislation will remain aligned to the proposal”.

“We’ll await that final legislation before diving into the weeds,” he said.

Ultimately, Viola argued the government simply needs to leave super alone.

“It’s what sets us apart in the world and incentivises us to have great retirements and not lean on the public purse. The concessions were built in for a reason, if you keep diluting them you will remove confidence from the system.”