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Draft law for $3 million super tax reveals exemption details

Super

The additional tax on large balances contains provisions for child recipients, structured settlements and deceased members.

By Miranda Brownlee13 minute read

The government has confirmed a range of important exemptions for child recipients, structured settlements and deceased members in relation to the $3 million super tax in draft legislation released yesterday.

The bill reduces tax concessions for individuals with a total superannuation balance (TSB) above $3 million by imposing an additional 15 per cent tax on certain earnings under a new Division 296 of the Income Tax Assessment Act 1997.

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The policy is set to commence on 1 July 2025 and apply from the 2025–26 income year onwards.

“From the 2025–26 income year onwards, the overall tax rate applied to a percentage of future earnings equal to the percentage of an individual’s total super balance above $3 million will be up to 30 per cent,” the explanatory memorandum for the draft bill explains.

The proposed changes will result in individuals with total super balances above $3 million receiving less generous tax concessions in earnings.

The EM said that for each income year, the Commissioner would calculate a Division 296 tax liability and notify individuals. Division 296 tax would be levied at a rate of 15 per cent on a percentage of the individual’s superannuation earnings equal to the percentage of their TSB above $3 million.

Division 296 tax would be levied directly on individuals and imposed separately from personal income tax and superannuation fund tax. Individuals would have the option of paying their tax liability by either releasing amounts from their superannuation or using amounts outside of the superannuation system. Tax associated with a Division 296 tax on defined benefit interest could be deferred.

Negative superannuation earnings from balances above $3 million would be carried forward and used to reduce the amount of superannuation earnings subject to Division 296 tax in future income years.

While all individuals with taxable superannuation earnings on balances above the $3 million threshold will be liable for the new Division 296 tax, the EM states that a range of exemptions apply including:

  • Child recipients of superannuation income streams at the end of the income year.
  • Individuals who have a structured settlement contribution made in respect to them as a payment for a personal injury at the end of the income year, or any year prior.
  • Individuals who died before the last day of the income year.

The EM confirmed that child recipients were to be exempted from Division 296 tax on the basis that these amounts were required by law to be cashed out when reaching age 25 at the latest (unless the child recipient was disabled).

“This is an existing concept in the legislation as these individuals already have modified arrangements for the Transfer Balance Cap (see section 294-175 of the ITAA 1997),” it said.

“Child recipients that have a permanent disability will continue to be excluded, even after reaching age 25. This reflects that these individuals may have had limited opportunity to earn income and accumulate their own superannuation.”

Individuals who have had a structured settlement contribution made in respect to them would also be exempt from the new tax.

The explanatory memorandum said this recognised that these contributions were usually large payments that could provide the ongoing medical and care expenses resulting from serious injury and income loss.

“This is consistent with the treatment of structured settlement contributions under the Transfer Balance Cap provisions,” it said.

The EM also said the superannuation earnings of a person would not be taxed in the event of their death before the end of the income year.

The government said that special rules for the modified treatment of defined benefits and some retirement phase interests, including the valuation of such interests, would be addressed through specific provisions in subsequent regulations.

The draft Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023 (the Bill) and the Superannuation (Better Targeted Superannuation Concessions) Imposition Bill 2023 were opened for consultation yesterday. They enact changes to superannuation tax concessions previously announced in the 2023–24 budget.

Draft law for $3 million super tax reveals exemption details
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