The existence of superannuation balances exceeding $10 million is largely a legacy issue, unlikely to recur under the current regulatory framework. Historically, the system permitted the accumulation of disproportionately large balances – far beyond the original policy intent of concessional tax treatment within superannuation. Over time, this imbalance will naturally resolve as these members exit the superannuation system.
In the meantime, introducing a higher tax rate for balances above $10 million is a pragmatic step toward improving the long-term sustainability of superannuation concessions. Individuals affected by the change can explore alternative investment vehicles, particularly where a condition of release has already been met.
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However, when the government designed Division 296, it was clear it would face criticism. An additional tax impost will always have detractors, but when sound tax principles are applied – fairness, simplicity, and efficiency – Australians typically accept the outcome and move on.
Unfortunately, Division 296 departed from those principles. What began as a thought bubble was pursued despite overwhelming evidence that it was fundamentally flawed. The most egregious elements were the taxation of unrealised gains, the absence of symmetry between gains and losses, and the lack of indexation. Despite repeated warnings and constructive alternatives from the tax profession, there was no meaningful consultation. Instead, Treasury maintained that its approach was the only viable path forward.
Now, inevitably, we have come full circle – back to the negotiation table, attempting to design an alternative mechanism for taxing high-balance accounts. Unrealised gains will finally be excluded from the earnings base, as they should have been from the outset.
For self-managed superannuation funds (SMSFs), which are the primary group impacted by Division 296, attributing a higher tax on realised gains to members is relatively straightforward. However, for large APRA-regulated funds, the logistics are far more complex. Treasury now faces the difficult task of determining how the earnings base will apply, particularly for high-balance defined pension accounts.
I attended the Senate Inquiry examining the legislative amendments to implement Division 296. In my career as a tax advocate committed to sound policy outcomes, I have rarely been more disappointed. The message from the Chair was unambiguous: adhering to good tax principles was never part of the conversation. The prevailing attitude seemed to be that fairness, simplicity, and efficiency were expendable when only a small number of people were affected. It was a fait accompli.
We now face a year-long delay to establish the earnings base for applying higher tax rates on superannuation. This lost time represents a wasted opportunity and foregone revenue – time that could have been spent collaborating with the profession to craft a workable, principled solution that achieved the Government’s stated aim without compromising the integrity of the tax system.