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In February 2023, draft legislation for the Division 296 tax was introduced to parliament. At the time, the proposed tax—which targets people with super balances over $3 million—was referred to a senate committee for review. More than a year later, on May 10 2024, that committee reported back with a majority recommendation to pass the bill unaltered.
While the financial industry has been abuzz with discussion about the potential introduction and implications of this proposed tax, the Government has remained noticeably quiet. The Federal Budget was shared the week following the senate review results, and even there, little mention was made of it.
With paltry communication about the implications of this proposed tax, people are looking to the financial industry—1the very industry whose consultation has not been listened to by the Government—to clarify the impacts of this tax, should it be passed in its current state.
Since this legislation was first introduced, our team has launched into action. We’ve deep dived into the many possible implications of this proposed tax and have been working with our clients to map out how this tax may personally impact them if it passes in its current state. Through rigorous interrogation and analysis, we’ve been able to equip ourselves and our clients with greater clarity for what may lie ahead. However, we’ve also emerged from this period with a sense of alarm.
While there are plenty of credible voices speaking out to demystify the potential implications of this proposed tax, there is also a lot of misinformation circulating. To clarify the confusion, we’ve compiled some of the most pervasive myths about the proposed $3mil super tax in a bid to set the record straight.
It’s important to note that these myths and truths are based on a simulated reality in which the proposed tax passes unaltered.
Let’s take a look:
This is a tax on the "earnings" from a super fund, not just the income. "Earnings" include more than the usual taxable income like interest, rent, dividends, or capital gains on assets that have been sold. It also encompasses the growth in assets that the fund hasn’t sold. Essentially, it’s an additional tax on unrealised capital gains.
If this proposed legislation passes, Australia will be the only OECD country to tax unrealised capital gains—which begs the question, once you’ve opened the door to taxing unrealised capital gains in super, what will be next?
It’s not all earnings that will be taxed at 15%, but only the proportion of earnings over $3 million. This means that the tax applies specifically to the earnings on the amount exceeding the $3 million cap, not the entire super balance.
The people who will be hit hardest by this tax are SMSF members who asset rich but income poor. For these people, the initial tax bill is likely to mark the start of a difficult cycle.
They will face the pillar-to-post challenge of getting ahead, while the previous year’s tax bill continues to reduce their liquid cash and their unrealised capital gains continue to climb.
From the moment this proposed tax came to light, there was an immediate concern for farmers, many of whom hold their property in an SMSF. 2In late 2023, an Association of Superannuation Funds of Australia (ASFA) report claimed that only 1% of SMSFs with balances of $3 million+ have income related to farming activities. However, this conclusion doesn’t paint an accurate picture of the situation because the ATO data used in this report only includes 3farms that have generated a profit.
In reality, many farmers are likely to feel the pain of this new tax. Due to the way the $3 million super cap is designed, a farmer's rising land value could increase their tax bill, even if they haven’t generated any income that year. The proposed legislation assumes that rising land values will lead to higher revenue through increased lease yields. However, this outlook is oversimplified and fails to consider the various factors affecting a farm’s performance.
Farmers face fluctuating incomes due to factors beyond their control—weather conditions, growing seasons, market prices—these are just the tip of the iceberg when it comes to the factors that determine a farm’s performance. Unfortunately, there’s nothing in the Division 296 tax that factors this in, which means that farmers may face increasing tax bills because their land value has increased, despite their revenue not rising alongside it.
For the vast majority of people, the amount they hold in their super has taken a lifetime to grow. They have worked incredibly hard, sacrificing immediate consumption to build their retirement savings. This new tax penalises these individuals for their dedication and long-term planning. It affects not just the ultra-wealthy, but everyday Australians who have diligently saved and invested for a secure retirement.
The $3 million cap is proposed to not be indexed, meaning it won’t adjust for inflation over time. 4Peter Burgess from the SMSF Association points out that for those entering the workforce today, it's estimated that around 500,000 super balances will eventually breach the cap, with about one-third of these super fund members currently under 30. For a 30-year-old today, a $3 million balance will effectively be worth about $1 million when they retire.
This tax assumes that individuals will not make changes in how they manage their money, which is simply unrealistic.
It’s important not to be reactive. Firstly, no one should make any decisions until we have actual legislation. While it’s wise to be aware of this tax and the possible implications it may have if it’s passed in its current state, remember that it has not yet been made law. It may be voted down or passed with amendments.
Secondly, if an individual were to move that cash or asset into their own name, they would then pay tax on all the earnings at their personal tax rate. There are many knock-on effects unique to your specific situation that need to be considered before making any rash decisions.
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While the proposed $3 million super cap tax has generated significant debate, it's important to separate fact from fiction. Many of the myths surrounding this tax are based on misunderstandings or oversimplifications of its potential impact. The reality is that this tax could affect a broad range of Australians, not just the ultra-wealthy, and could have unintended consequences for those who have carefully planned their retirement savings.
As the legislation is still under review, it's important to stay informed and chat with Ulton's Wealth Managers, Jes Wilkinson or Kylie Wright, to understand the full implications for your situation. By doing so, you can make well-informed decisions and prepare for any changes that may come.
Sources
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