What Private Business Owners Need to Know
For many self-managed super fund members, Division 296 has become a real concern.
That is especially the case where the SMSF is tied up in assets that have grown in value over time. Farmers, business owners and long-term SMSF trustees often do not think of themselves as sitting in a high-balance superannuation category in the same way as someone with a large listed share portfolio. That is especially so where the asset is something like farmland, which may never be sold and converted to cash.
The impact of Division 296 is now a commercial issue for SMSF members who are reviewing their asset position and thinking about how their business and superannuation structures will operate over the long term.
Two Thresholds
The $3 million threshold
If a member’s total superannuation balance is above $3 million, an additional 15 per cent tax applies to the proportion of their taxable superannuation earnings.
The $10 million threshold
A further 10 per cent tax is proposed on the proportion of earnings above $10 million.
Payment of the tax
The tax is payable by the member. The member can, however, request the SMSF pays the tax.
This can create pressure where an SMSF member has a high balance, but the underlying assets are low-yielding or difficult to sell. That is relevant for SMSFs holding farmland, business real property or other long-term assets.
A person can be balance-sheet wealthy inside super without having cash available to pay an additional personal tax liability. A property can sit in the fund for many years and the structure may appear stable and conservative. But if the asset has appreciated significantly, the member can find themselves over the threshold even though nothing has changed in their day-to-day spending power.
A Farm Example
Assume a farmer has operated through a trading partnership for many years. The farmer’s SMSF owns farmland that is leased to the partnership. The partnership has a formal lease over the farmland and pays commercial rent.
The arrangement may have made sense for retirement planning and asset protection. The SMSF receives rent and the trading business continues to operate from the land. Over time, however, the value of the farmland has risen sharply, more so than the rental value of the farm.
Division 296
The farmer has not become wealthier in any real sense. They still have seasonal costs, business debt, machinery needs and ordinary commercial pressures. But on paper, their superannuation balance may now be above $3 million. This is the kind of member who needs to understand Division 296.
The rules do not just look at whether the SMSF earned cash rent. They also look at whether the member’s total superannuation balance is above the threshold and how much earnings are attributable to that member. Once a member crosses the threshold, the position changes. The SMSF is no longer simply operating in the ordinary concessional tax environment. It becomes part of a high tax regime.
Calculating earnings for Division 296
The new law no longer taxes unrealised gains. At a broad level, the calculation works as follows:
- Start with the fund’s taxable income or loss for the year.
- Reduce that amount for concessional contributions.
- Increase the amount for any exempt current pension income.
- Reduce the amount for taxable capital gains.
- Increase the amount for taxable Division 296 capital gains.
- Reduce the amount for any non-arm’s length income.
- Apply the Division 296 tax rate (so 15% or 10%) to the Division 296 income.
A member’s share of the fund earnings is based on the average value of their superannuation interest relative to the value of the fund. That means segregation of fund interests is not, of itself, an effective strategy to reduce Division 296 tax.
Members with multiple SMSFs
The threshold does not apply fund by fund in isolation.
A member may have an SMSF, but also retain benefits in an APRA fund. Div 296 looks across the person’s superannuation position. A member may be affected because the combined superannuation exposure across different interests exceeds the threshold.
That matters because many people think about their SMSF as a standalone structure. They focus on the farm or business property in that fund and overlook the rest of their superannuation position. Under the revised model, that does not work.
Why this matters for business real property
A farm held in an SMSF is usually not there for short-term speculation. It is often there because the family wants the land retained for the long term.
That strategy can still make sense. But a large rise in land values can create havoc. The member may become exposed to Division 296 despite having very little flexibility to sell part of the asset or generate extra cash to meet a personal tax bill.
What lenders look for
Division 296 should not be dismissed as something that only affects a tiny group of ultra-wealthy investors.
It has real consequences for ordinary private business families who have spent decades building value inside
superannuation, especially where that value sits in business real property such as farmland.
It also matters for current private business owners who are making long-term structuring decisions for their businesses.
Final thoughts
If your SMSF owns the farm and leases it back to your trading business, you may already be closer to the threshold than you think.
If you are “over” Div 296, the issue is that the tax is no longer theoretical. It becomes a matter of understanding how the tax is measured, how earnings are attributed, and how the liability will be funded where the asset base is not liquid.
In part 2 we will consider the transitional provisions of the Div 296 tax and planning opportunities SMSF members can consider.
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