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Self-managed superannuation funds (SMSFs) have long been an attractive avenue for property investment. However, recent proposals regarding Division 296 tax have stirred concerns among the SMSF community, particularly regarding its impact on taxable superannuation earnings.
Before delving into the issues surrounding Div 296 and its potential impact on SMSF property investments, let’s take a look at the proposed tax.
Division 296 tax, when enacted, will reduce tax concessions for high super balances by applying an additional 15% tax on the increase of superannuation balances of over $3 million. However, it's important to note that if a fund has negative superannuation earnings, it may not be subject to this tax.
While the additional tax will be levied on the individual rather than the super fund, they’ll have the option of paying the tax via either of the following:
The introduction of Div 296 tax will potentially impact property investors in a number of undesirable ways.
The calculation includes increases in value on property that hasn’t been sold, therefore potentially taxing gains on a property that may never be realised.
There’s also no refund of Div 296 if the property sold is less than the value included in the calculation.
Even though Div 296 includes increases in property value in the calculation, capital gains tax is still payable on the whole gain when the property is sold.
The enactment of Div 296 may present cash flow issues. This is because it needs to fund taxes on investments that haven’t been realised, especially for farmers and small businesses where there may be little to no wealth outside of super to cover the tax liability.
Similarly, property investors may face challenges in generating sufficient liquidity to cover the additional tax burden, especially investors with large portfolios of properties. Paying the tax on multiple properties simultaneously could strain their cash flow and financial resources.
More frequent and detailed property valuations may be required. Because of this, the increased cost of formal valuations may reduce the benefit of holding the asset in super. This is in addition to the increase in costs in general to accommodate the calculation and to meet the compliance obligations of the Div 296 tax liability.
Costs of long-term planning to assess the member’s financial situation, objectives, and tax planning needs to gauge the most appropriate course of action in determining whether or not to withdraw the member’s balance in excess of the $3 million from super where a condition or release has been met.
Stamp duty, legal costs, etc, payable on the transfer of property from an SMSF to a related party to avoid the additional tax could reduce the profitability of the property.
The Division 296 tax is proposed to begin on 1 July 2025, so now’s the time for SMSF trustees to review member balances and the investment strategy to consider any impact of the new tax on fund members.
While the full implications of the proposed Division 296 tax remain uncertain, It’s essential that SMSF trustees stay informed, seek expert advice, and carefully assess the impact on their investment strategies.
As the regulatory landscape evolves, proactive management and strategic planning will be key to navigating the complexities of self managed superannuation fund property investments in the face of the proposed tax.
Need help proactively managing and strategic planning for your SMSF properties? Reach out to our SMSF Specialist Cass Smith on (02) 4925 1000.
