Government unveils further details on $3 million cap in draft legislation
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 today.
Draft legislation has been released on previously announced measures to modify the tax on certain earnings for individuals with balances above $3 million in super.
The government today opened consultation on the Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023 (the Bill) and the Superannuation (Better Targeted Superannuation Concessions) Imposition Bill 2023, to enact changes to superannuation tax concessions previously announced in the 2023–24 budget.
The Bill reduces the 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.
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 will calculate a Division 296 tax liability and notify individuals of their tax liability for a given income year. Division 296 tax will 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 will be levied directly on individuals and imposed separately to personal income tax and superannuation fund tax. Individuals will 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 may be deferred.
Negative superannuation earnings from balances above $3 million will be carried forward and used to reduce the amount of superannuation earnings subject to Division 296 tax in future income years.
Child recipients, structured settlements, deceased members exempt from new tax
While all individuals with taxable superannuation earnings on balances above the $3 million threshold will be liable for the new Division 296 tax, the explanatory memorandum 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 and individuals who have died before the last day of the income year.
- Individuals who have died before the last day of the income year.
The EM confirmed that child recipients are to be exempted from Division 296 tax on the basis that these amounts are required by law to be cashed out when reaching age 25 at the latest (unless the child recipient is 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 with respect to them will also be exempt from the new tax.
The EM said this recognises that these contributions are usually large payments that can 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 states that the superannuation earnings of a person will not be taxed in the event of their death before the end of the income year.
The government said that special rules for modified treatment of defined benefits and some retirement phase interests, including the valuation of such interests, will be addressed through specific provisions in subsequent regulations.
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