NTAA flags potential revised Div 296 tax implications

However, “despite these improvements there are certain aspects of the revised Division 296 tax proposal on which the NTAA would like to comment,” the association said.

The method used to determine if Div 296 is payable by an individual, the potential tax implications following the death of an individual, and the impact of the revised proposal on individuals receiving a reversionary death benefit pension were the three key areas the professional body provided feedback on.

NTAA noted that, under the revised proposal, a Div 296 tax would arise for an individual for an income year where their TSB just before the start or end of the year was greater than the large superannuation balance threshold (excluding the first year, where only the closing TSB is taken into account under transitional measures).

 This is in contrast to the original proposal whereby liability for the Div 296 tax is determined solely by reference to the individual’s TSB at the end of the income year.

The government described this as an “integrity measure to ensure the liability for Division 296 cannot be avoided by reducing the TSB prior to the end of the income year” and indicated the measure would still apply where an individual’s TSB had decreased or did not exist at the end of an income year.

According to NTAA, this would create “unfair Div 296 tax consequences” as it was assumed the integrity measure would continue to apply even where an individual’s TSB had decreased during an income year in legitimate or unavoidable circumstances.

“If the Government’s intention is to use an individual’s TSB just before the start of or at the end of an income year (for determining any liability to Division 296 tax) purely as an integrity measure, the NTAA recommends that this be replaced with a more targeted approach,” NTAA said.

“This could involve determining an individual’s liability to Division 296 tax for an income year solely by reference to their TSB at the end of that income year, before then adding back to the individual’s year-end TSB, superannuation withdrawals made during the year.”

The revised proposal also contained transitional arrangements to ensure that an individual who passed away before the last day of the 2027 income year would not be liable to pay Div 296 tax for that year, whereas the original proposal stated there would be no liability for any income year if a death occurred before its end.

The NTAA expressed that this revision of the Div 296 tax could be seen as a “death tax” in the absence of a transitional measure, as a Div 296 tax liability could still potentially arise following the death of an individual.

“Furthermore, this suggests that an individual’s TSB will remain on foot even after they have passed away and that a Div 296 tax liability can still arise where the deceased’s (notional) TSB at either the start or end of an income year (after their death) exceeds the large superannuation balance threshold of $3 million,” the association said.

“NTAA strongly urges the Government to amend its revised Division 296 tax proposal to ensure that a permanent exclusion from Division 296 tax applies in respect of a deceased individual’s superannuation entitlements in the year of death and in all future income years.”

The final key area NTAA provided feedback included the fact that for TSB purposes, a beneficiary receiving a death benefit pension would effectively ‘inherit’ the value of the death benefit pension upon the commencement of the pension.

This would mean, in the instance of a reversionary death benefit pension, this would occur immediately upon the death of the deceased member, which could result in a Div 296 tax liability for the beneficiary from the income year in which the beneficiary becomes the recipient of such a pension.

The NTAA said an individual in this situation could potentially avoid such a liability where they commute (if eligible) a sufficient amount of their reversionary pension before 30 June 2027 and pay the commuted amount as a lump sum death benefit, so that their TSB dropped below $3 million.

“Many reversionary beneficiaries in this situation who are affected by the death of a family member could easily miss the small window of opportunity to commute their pension by 30 June in the year of death,” NTAA said.

“In light of this, the NTAA submits that the Government should consider providing a similar 12-month deferral concession for reversionary death benefit pensions when determining a beneficiary’s TSB for Division 296 tax purposes.”