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It has already been revealed that there will be some superannuation members who will be excluded from Division 296, but there are also “carve outs” of the tax in relation to earnings on particular super interests, says a technical expert.
Leigh Mansell, director of technical and education for Heffron, said in the most recent Heffron quarterly SMSF technical update that the draft legislation has already indicated that a certain group of people will be excluded from the proposed Div 296 tax.
“The people who will be permanently excluded include anyone who has ever received a structured settlement contribution, that is a payout because of a personal injury that they have contributed to super, even if those contributions have already left the system,” Mansell said.
“There are also moment-in-time exclusions for certain people such as child recipients of death benefit pensions because their parents have died. They're excluded, but only while they're in receipt of that child death benefit pension. Additionally, anybody who dies before 30 June - not on 30 June - in a particular financial year. They're carved out from Div 296 tax in the year of their death.”
Mansell said in addition to excluding those people there are also carve outs in relation to earnings on particular super interests that people might hold.
“These have been called Div 296 excluded interests and the earnings on these interests will not be subject to Div 296 tax,” she said.
This will include interests held by clients who are members of a constitutionally protected fund such as state-run funds for people who are high-level state government employees or judges, state ministers, state governors and governors-general. It will also include interests in the Judges Pension scheme for sitting Commonwealth judges appointed before 1 July 2025, but not retired judges from the year after their retirement.
“The carve out for Commonwealth Judges was raised as a potential issue but the Senate committee came back and stated the intention of the legislation is to create an even playing field for everybody, including retired judges, so we now have different rules for whether you've got a sitting judge or a retired judge,” she said.
“Earnings on interests held in non-complying funds are also considered excluded interests because they're already taxed at 45 per cent.”
Mansell said to carve out earnings you first determine the total super balance at the end of the year, the first time will be on 30 June 2026, just as would occur with any client under the new legislation.
Using an example of a client, Tara, Mansell said the process would involve calculating her TSB at the end of the year, adding back any withdrawals, subtracting any contributions made in that financial year, and then comparing the result to her TSB at the previous 30 June.
“In this particular case, let's assume Tara’s TSB at 30 June 2026 was $4.5 million and no contributions and no withdrawals were made in 2025/26. If Tara’s TSB at 30 June 2025 was $4.2 million she has $300,000 of normal earnings that could be caught by this new measure, but because she has also got a Div 296 excluded interest and because she's got positive normal earnings, there's a separate calculation that gets done to carve out some of those earnings,” she said.
“What happens is earnings on the Div 296 excluded interest, that is the constitutionally protected fund interest or the interest in the Judges Pension scheme for a sitting Commonwealth judge, would basically be disregarded and the calculation of earnings would be done on everything else.”
She concluded that the carve out would only apply to the earnings when looking at how much would be subject to tax.
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