Kim Bigg:
Hi everyone and welcome to the Show Me the Perks podcast. This is episode number 17 and I’m your host, Kim Bigg. Today we’re diving into a critical topic for our listeners, the upcoming Division 296 tax, which we believe will be introduced to Parliament in the very near future and possibly taking effect from 1 July 2025. Joining me today is Peter Burgess, CEO of the SMSF Association, who will help us to unpack the implications of this new tax.
For our listeners, Peter Burgess is the Chief Executive Officer of the SMSF Association. With over 30 years of industry experience, Peter is recognised as an authority in SMSF matters and government policy design. He’s a widely published author and media commentator on SMSFs and is regularly sought for comment on the latest policy and sector developments. And I welcome Peter and am very grateful for his time and coming to speak with us today.
Peter Burgess:
Thanks Kim, it’s a pleasure to be here.
Kim Bigg:
Fantastic. So, I know Peter from past experiences getting taught superannuation lessons and otherwise from at the Adelaide University and a few other places. So really pleased when I reached out to Peter that he took up the offer to come and talk to us. Division 296 or otherwise known as the three million in super tax. It’s been getting a lot of airplays over the last little while and we thought it would be a great opportunity to get Peter into do a little bit of myth busting across the Division 296 tax to help our listeners understand a little bit more about the tax and also just sort of challenge a few ideas on who this is going to affect the most. So, I’m going to jump into questions straight away and it is going to be perhaps me firing questions and Peter coming back but hopefully that works well.
Peter Burgess:
It’s fine, yes.
Kim Bigg:
Excellent.
Okay, so firstly, do we have any indication on when the Division 296 legislation will be reintroduced, bear in mind, it was introduced earlier this year and got defeated? When will we reintroduce for consideration and approval by the politicians, and do we know when it will be effective from?
Peter Burgess:
Well, we don’t know when it is going to be reintroduced. We do know that the new parliament will sit for the first time on 22nd of July, so there is a sitting week, those last two weeks of July are sitting weeks.
Kim Bigg:
So that is a good, about seven or eight, seven weeks away from now is the first time that it’ll even be introduced. So, we’re not going to know whether it’s going to get past this side of 30 June.
Peter Burgess:
We won’t know until closer to that date as to whether it will be listed for debate and introduced into the lower house in those first sitting days.
I wouldn’t imagine this is the priority of the government. So, the HECS changes, for example, we think would be a higher priority than this. And also, some of those other cost of living reforms is looking to bring into play. So, you know, we may well see this legislation introduced into the new parliament in those first two sitting weeks. We just don’t know at this point. And also, to your question around the start date, well the government at the moment is saying 1 July 2025. We will certainly be making representations to government, and we have done so in the past and will continue to do so, that they need to defer that start date. So, we don’t think it’s appropriate or reasonable to bring it in 1 July 2025, given that it won’t be passed until at the earliest, late July. So, you know, people need enough time to make adjustments to their supernation arrangements to meet this tax. And whilst the government may say that it’s been out there for a while now, I think it’s unreasonable to expect people to make changes based on law. Legislation is not law.
Kim Bigg:
That’s exactly right.
Peter Burgess:
So, you know, we’ll certainly be making those our views on those very clear to the government.
Kim Bigg:
And have they given any… did you have any insight as to the success rate likelihood of your request to, you know, at the very least push it back 12 months or something on those?
Peter Burgess:
Not at this stage.
Kim Bigg:
They haven’t made any comment to…
Peter Burgess:
No, no comment, but we will continue to voice our concerns about the design of this tax. There are so many things wrong with this tax and, you know, we really do hope that the government takes the time now to reflect on the concerns that have been raised about this tax, so many concerns and the criticism of this tax. We really hope they do take the opportunity now to, you know, to listen to those concerns and to make changes to this legislation. And as I said, we’ll certainly be continuing to voice our concerns as have many others across the community.
Kim Bigg:
Absolutely. And I look forward to another seven weeks of continuing AM radio talking about all the different reasons why the tax is no good. If they make it seven weeks continuing to talk about it, that’ll be a good run. On to that, you hear a lot of stories and certainly in my travels, I hear a lot of stories around, let’s say, business owners and clients of Perks who, I guess, are getting caught by myths or otherwise around division 296, they’re really thinking it’s a tax, in a certain way, and they think that it means every, know, they have to, I’ve heard people telling me that, you know, anything above three mils is going to come out of super, it’s legislated, it’s got to come out, which is actually not the case. There are people saying that whatever you’ve got above three mils is going to get taxed. You know, if you’ve got 10 million super and you’re seven mil above the three mil, they’re going to take out a hundred and, you know, 15 grand for every million dollars you’ve got above three mil.
Yes. Some of these are, you know, these are what I call myths. I mean, perhaps you can debuff those couple of things straight off the bat. And I guess what other myths do you find yourself debuffing in your travels as well?
Peter Burgess:
Yes, I think that the two main ones that we see, and if you’ve sort of touched on some of that, but this tax will not apply to all the earnings in your in your superannuation account, if you’re over $3 million, it only applies to the earnings attributable to your balance above three million dollars. So that’s a common one we see that people think it’s the whole thing. It’s the whole thing but it’s only the proportion of your earnings above three million dollars which you know is a complexity decided to this tax but that’s one of the miss that we see on this. The other one is the view that leading up to 30 June 2026 which if this legislation goes through as proposed that will be what we call the first test time. So that’ll be the date in which you were first tested to see whether you’re over $3 million.
Kim Bigg:
30 June 2026 balance.
Peter Burgess:
30 June 2026 balance. That’s right. So, we often hear people saying, well, there’s no point in taking out withdrawals, taking money out to get below that limit, because withdrawals and those things are added back. But that’s not the case for the purpose of determining whether you’re over $3 million. It is a valid strategy to take money out to get below $3 million by 30 June. There’s another calculation that they use to calculate earnings for the purpose of this tax and that’s where you add back your withdrawals and take off your contributions. But for the purpose of determining whether you’re over $3 million, those withdrawals. don’t get included in that calculation.
Kim Bigg:
If you’re under three mil, you’re under three mil and there is no tax to pay.
Peter Burgess:
That’s right.
Kim Bigg:
And just, just on that, it is quite a difficult calculation to work out. Yeah. I mean, I can at least see some of the logic behind why they might have thought this was sensible legislation in the sense that they can just pick off people’s member balances and try to tax it in a certain way, at least it was readily available information. But can you give a little bit more insight into what are the, you know, I reckon there’s two, but you might have some more, two key issues with the legislation. They are that it taxes unrealized capital gains, which is getting a lot of airplay. And it also taxes, it doesn’t get indexed. So, know, what’s 3 million now will become very mainstream or very middle Australia very quickly without any indexation. Yeah. Perhaps if you can touch on those two and any other things that you find as being the key, you know, deficiencies in the legislation, if you like.
Peter Burgess:
Yeah. So, look, the taxing of unrealized capital gains has been the topic of conversation as it should be. This is a departure from the fundamental tax system in this country. We only tax people on income they earn. We don’t tax them on income they haven’t earned. Exactly. And how have we ended up here? Well, what they’re trying to do here is to bring in an earnings tax, so a tax on the earnings that are allocated to your supernation balance but call it a personal tax liability. Now, the systems, the large funds, super funds, the systems they use are just not sufficiently sophisticated in order to do that. So, what they’ve had to do is they have this work around calculation of earnings, which is based on the increase in the value of your supernation balance through the course of the year adjusted for withdrawals and contributions and they call what’s left over earnings. But by definition, your balance includes unrealised capital gains. So, by measuring the growth, it’s actually picking up unrealised capital gains. And of course, the problem with that and the reason we don’t tax unrealised capital gains in this country is it causes liquidity problems because you’re asking people to pay tax on income they haven’t received. So, you know, by definition, they’re to have to dip into their cash reserves in order to pay this tax. And that is a major flaw in this legislation and it’s something we’ve been fighting so hard for the government to, you know, to really understand.
And I’m sure they do, but we do need to fix this. I think the other issue here is, and this has been playing out in the media over the last few weeks here, is that there are many areas of the community that rely on funding from self-money super funds. When we think about startups in the healthcare sector, when we think about startups in IT, renewable energy, a lot of that funding comes from self-money super funds and you know that type of funding source will just completely dry up if you’re to take tax on unrealized capital gains.
Kim Bigg:
Especially because that style of asset is speculative by nature and probably gets very little dividends which is where most of the tax benefits come from in super and if you’re going to have heavy unrealized gains as being your main source of income this thing’s going to tax you very hard on the way through on hypothetical gains, which we all know with speculative investments don’t necessarily come off because you like the way you hope they would.
Peter Burgess:
No, that’s right. And the other one you raise is around indexation. So that is another big flaw with this legislation that it’s proposed that it won’t be indexed. It will stay at the $3 million threshold. And, you know, as you mentioned, three million dollars today is not going to have the same value in 10 or 20 years’ time. We know some from some of the analysis that’s been done that. The average 22 year old today, by the time they reach 65, will have a balance in excess of $3 million. And this tax is likely to affect over half a million people by the time they retire that are currently in the workforce. So that’s a big flaw. I still believe that the government will index, that they will eventually agree to that. But for us, the main issue here is the taxation of unrealised gains. The design of that tax is fundamentally flawed.
Kim Bigg:
Yep, couldn’t agree more. And let’s hope the Greens don’t get their way and try to push it to two mil as well. So on to other matters. I guess, fundamentally, I am opposed to the tax, partially due to the nature of it, but also due to the fact that there was, there are caps already in place with our superannuation to actually prevent really large balances anyway, the government just hadn’t allowed time for those to to generate and actually come to fruition because inevitably with superannuation, people as sure as taxes is death and eventually someone passes away and when they pass away, their money comes out of super anyway. So inevitably these large balances were going to come out of super in time anyway. And as for people like myself who are continuing to try to contribute to super over time, once you have 2 million in super, not that I’m there yet, but once you have 2 million super, you can’t put any more in anyway, other than some very modest employer concessionals each year anyway. So, to some extent, it was going to fix itself anyway, over time, they just didn’t have the patience to allow it to run its course. I mean, do you have any comment in relation to that? It seems a bit, it’s an ill thought through tax, but it’s also just not very patient tax.
Peter Burgess:
Well, you’re right. This is a legacy problem. We now have caps on contributions, we have caps on the amount you can move into the pension phase. So those caps are designed to ensure we don’t build up large amounts of balances in super. So, this is very much about people that are able to do that prior to having those caps in place. And those caps will work and they are designed to ensure that these large balances are washed out of the system over a period of time. As you said, as people pass on, they have to come out and they can’t all come back in because of those contribution caps. So, we have a system there that we just need to give it time to work. I guess from Treasury’s perspective, it’s just going to take too long for that money to be washed out. You’re looking probably two decades before it’s all sort of washed out of the system and for them, that’s too long.
Kim Bigg:
That was deemed too long. Yeah, excellent. So one of the key issues for a lot of our clients is probably twofold. One is, let’s say, farmers with a lot of land in their SMSFs, this very much affects those. And there’s perhaps also people with their own businesses, business premises held inside their self-managed super fund as well. So, can you just give an insight into why this tax is particularly bad for farmers with land in SMSFs and perhaps also general business owners with their business premises held inside their SMSF?
Peter Burgess:
Yeah, yeah, look, it’s…We know in case of farmers, there’s around about 17,000 self-money super funds have a primary production land in their self-money super fund. And we know of that at least three and a half thousand will be impacted by this tax from day one. So, in other words, they have a member in their SMSF that has a balance of more than $3 million. The real problem for farming property of course, is the land value can go up very quickly, but the yield doesn’t go up by the same amount of common cases, 2 % or 3 % yield. And this is a point that we’ve really tried to reinforce with the government because the view from government is that well, if you’re the value of your assets going up, the income you’re getting from that asset should always should also go up. So, you should always have sufficient liquidity to pay this tax. Now that is not the case. And when we’re talking about primary production land, and again, this is why we say this tax system has not been thought through. So, for farmers that have their land in the SMSF, this is a real liquidity problem for them because they just may not have the liquidity in order to pay this tax in their fund or even outside of their fund.
Kim Bigg:
And that touches on another point. And to clarify the reason why we concentrate on the farmers land is because they can’t just sell it. It’s an heirloom asset they intend to pass on to their children or family or otherwise down the track. If they were listed shares, I’m sure the people in question would sell some shares to generate some cash in order to pay the tax. That wouldn’t be the major issue at hand. The fact that the unique part about farmers is that’s not really an option for them. They can’t sell it. So therefore you’re creating a tax on an asset they haven’t sold and aren’t generating sufficient cash to be able to pay.
Peter Burgess:
Yes, absolutely right. And we know in the case of small business owners, there’s around about 75,000 self-money super funds own a small business in their fund or have a small business premise. And of those, we know that around 17,000 will be impacted by this tax from day one and they face similar issues.
Kim Bigg:
Yeah, very difficult issues and probably not ones that the Labour Party seeks to challenge too much. which is disappointing.
Peter Burgess:
Yeah, well I think on that, you know, the cash flow is the lifeblood for small business owners as we know. The lack of liquidity they’re going to have, they’re going to have to dip into their savings and retained earnings. that means they’re going to have to hold higher cash balances than they’ve had in the past. And that means less money available to invest in their business, to employ more people. And so that’s why this tax has a knock-on effect to productivity in this country, as well as innovation.
Kim Bigg:
Yeah, it’s going to be detrimental for the economy wide, as opposed to the…Let’s say the desire is of the government to target a few, how many people do they say it affects?
Peter Burgess:
Well, 80,000.
Kim Bigg:
80,000, so they’re going to target 80,000 people who they say are, in their words, wealthy, they’re above $3 million. They made the definition, and they believe that’s it. But ultimately it has far reaching effects across the economy wide as opposed to just purely affecting a few wealthy Australians.
Peter Burgess:
That’s right. And that’s the point we were trying to really stress here is it just hasn’t been thought through in terms of the unintended consequences. The other areas of the community, as I said before, they’re relying on funding from self-managed super funds. The impact on that is significant.
Kim Bigg:
This can be a very quick question if you’d prefer. Is the legislation as it was designed earlier this year designed to capture the defined benefit funds that so many politicians also have? You can leave it as yes or no if you like or delve into it if you prefer.
Peter Burgess:
No, and they’ve made this very clear to the government that the legislation is intended to capture.
Kim Bigg:
So, it is intended to capture those.
Peter Burgess:
Yes, so it will apply to them. What we don’t know right now though is exactly how much tax they’ll have to pay because if they’ve been in a politician for a long time, they’re an old fund and it’s a defined benefit fund.
We’re waiting for the regulations to be finalised so that we know how those pensions are going to be valued, how much tax they’ll have to pay. What we do know is that it will work differently for defined benefit members. So, lot of the politicians that are in these types of funds, if they’re in the accumulation phase, they won’t have to pay this tax straight away. So, they’ll be able to defer the tax. They’ll have a debt account, which when they move into the pension phase, that’s when they’ll have to start paying this tax. And you know, and people say, well, how is that fair when we’ve got farmers and others are going to have to pay this tax every year.
Kim Bigg:
We would all love to have a deferral on our tax. That’s the whole point of not paying a tax until you realise the asset. Yeah, perhaps we’re happy to pay a tax when we realise the asset. Absolutely. And not sooner. Just a little bit of a delving into, you know, we’ve done some modelling or at least, you know, and modelling is just hypothetical inside Perks where, you know, you challenge the idea, what if you bought a brand-new commercial property, inside super versus outside super. You do a few general assumptions on, you know, it might be 5 % growth, 7 % growth, all these types of things. Over the journey, it actually almost looks like, you know, with unrealised gains tax, it could almost be better on the outside of super until the point where if something at the end of it goes wrong, when you sell the asset, the CGT ends up being, generally speaking a little bit more on the outside than it does on the inside of super and it starts to even up. I would imagine at the SMSF Association, you’ve done a little bit of similar modelling. Do you have any comments around discussions you’ve had with either industry groups or otherwise on that type of thing?
Peter Burgess:
I think it’s certainly the case that the effective tax rate could well be higher inside super than outside super because you’re paying tax on unrealised capital gains in super if you’re over three million, but you’re not doing that outside super so when you do the effective tax rate, it could well be the case that you are paying a higher rate in super. But I think, you know, we get asked this question quite a bit, you what should I be doing? I’m over $3 million. Should I be taking that money out of super? There’s a lot to work through there. And what we say to people is certainly, in my view, not to be taking action right now. Let’s see when the legislation is passed because there is every chance that there may be some changes made to the legislation. So, we need to know exactly what we’re dealing with before we start making decisions about whether we’re going to take money out of super because, if we do that, there’s transactions costs, if it’s properties, know, stamp duty, there’s potentially a capital gains tax payable if you’re moving money out of super. And once you’ve done it, it’s very hard, of course, to get it back in. So, you know, we’re certainly encouraging people to seek professional advice before they take action on this legislation and then wait until we have something that’s been passed into law.
Peter Burgess:
And are you hearing stories about people already making changes to their portfolios now with no legislation actually in place? And in reality, it’s 30 June 2026 is probably the more valid date regardless of what that date they choose to be effective.
Kim Bigg:
We’re in a similar boat as far as telling people to pause, don’t take any action until you get professional advice or at the very least until the legislation comes out and you’ve got some clarity on it. Yeah, I guess hear stories about people doing that. I gather you do as well.
Peter Burgess:
Yeah. Now we’ve seen a bit of that and there’s certainly been a bit in the press about, you know, people taking action on this tax now, even people that don’t even have $3 million in super. And this is the issue when we make changes like this, it erodes people’s confidence in the superannuation system. And, you know, we’re trying to encourage people to make voluntary contributions to their retirement savings and they’re not going to do that in superannuation if they’re not sure what the rules are going to be when they finally retire. And this is the problem with this. It starts to erode confidence in the superannuation system.
Kim Bigg:
That’s exactly right. And I think one of the things that gets lost in all of this is all these people who have got more than $3 million in super have legitimately followed the rules all the way along. In reality, they’ve followed the rules so well and they’ve done it very well.
But they literally just followed the bouncing ball from the legislation that the government gave at the time, and they did it successfully. And now they’ve done absolutely nothing wrong. And all of a sudden, the government said, you’ve almost done it too well. And you’ve prepared for your retirement too well. So, we’re going to tax you for the pleasure of it. Which does represent a bit of a shift. And look, this division 296 tax is a significant change in the superannuation landscape. Yeah, I guess happy for you to add comment on that. It does feel a little bit like they’ve been targeted in the tax system.
Peter Burgess:
Well, you’re absolutely, you know, they haven’t done anything wrong. And in fact, at various stages during their life as a member, they’ve been encouraged to make contributions in the super the tax settings have actually encouraged people to make contributions, to make voluntary contributions in the super. So, it’s very unfair now we think to be changing the rules on these people. And actually, you know penalising them as if they have done something wrong.
Kim Bigg:
Yeah, and some of the early media and even the continuing media you hear now is how you know wealthy Australians are complaining about paying more tax well I think when you put it in the context of that it doesn’t it doesn’t quite resonate the same as you say they’ve been encouraged to put it in and they follow the rules literally as they’ve been asked to yes, just worked really well.
Peter Burgess:
Well, certainly the clients that we speak to that have large balances, they’re not opposed to paying more tax through their superannuation. It’s just the design of this tax that is the problem and then taxing people on those unrealised capital gains. It doesn’t need to be this way. There are other ways in which they can go about reducing those tax concessions without having such a big impact on the other areas of the community, which, as I’ve said, rely on SMSF funding. So, there are certainly other ways. In fact, I think this is probably the worst way they could go about producing these concessions for people with large balances.
Kim Bigg:
I couldn’t agree more. I sensed that this legislation is going to go through in some form because of the strong performance Labor had at the election recently and they’ll see that as a mandate to put it through in some form. So, I feel like it’s coming, but I couldn’t agree more. I wish as an accountant, wasn’t having to talk to all of our clients around having to deal with a tax that’s fundamentally, probably unfair on a large portion of small and medium business owners in Australia.
Yeah, look, I thank you very much for your time today, Peter. We’re really pleased to have someone like Peter, whose experience and role with the SMSF Association is very prominent in Australia. Got some fantastic insights and yeah, we look forward to continuing to watch where this Division 296 tax goes in future. And we thank all of our listeners for tuning in to Show Me The Perks. Hope you found today’s discussion with Peter insightful. And until next time, please stay informed and take care. Thanks everyone.
