The latest draft legislation has sparked a heated debate, leaving many wondering: Is simplicity worth sacrificing fairness? The Self-Managed Super Fund Association (SMSFA) has weighed in, arguing that while Treasury's pursuit of simplicity is commendable, the current revisions fall short of achieving a fair and equitable balance. But here's where it gets controversial: the SMSFA claims that the proposed changes could lead to unintended consequences and unfair outcomes for certain individuals, particularly those affected by circumstances beyond their control. And this is the part most people miss: the association believes there are more cost-effective and less complex alternatives that the government should explore.
In their submission to Treasury, the SMSFA acknowledges that the practical changes announced in October 2025 offer a more suitable method for calculating superannuation earnings. However, they argue that several critical issues require further attention. For instance, the imposition of Division 296 (Div 296) tax on individuals who may not directly benefit from the superannuation earnings in question raises concerns. Additionally, the attribution of inappropriate amounts of Div 296 earnings to in-scope members highlights the need for adjustments to minimize unfair outcomes.
But is the government overlooking a more sustainable approach? The SMSFA proposes simplifying the Capital Gains Tax (CGT) adjustment provisions, yet they express serious concerns about the long-term viability of Div 296, given the anticipated substantial increases in implementation and ongoing costs for the superannuation industry. These costs, they argue, will ultimately be shouldered by all superannuation fund members, not just those directly affected.
One of the most contentious issues raised by the SMSFA is the treatment of Total Super Balance (TSB) reference amounts, particularly concerning insurance proceeds. Individuals who receive Total and Permanent Disability (TPD) insurance payments through superannuation, often substantial sums intended for medical and care expenses, face potential Div 296 tax liabilities without any concessions. The association suggests either excluding these individuals from Div 296 or adjusting their TSB to reflect the insurance proceeds received.
Similarly, the death of an insured member can lead to unintended tax consequences. If life insurance proceeds allocated to a deceased member's account are not paid out to beneficiaries before the end of the income year, it could trigger a Div 296 tax liability that would otherwise not exist. The SMSFA recommends adjusting the deceased member's TSB by the amount of life insurance proceeds to prevent such unfair outcomes.
Another point of contention is the proposed use of the greater of TSB opening and closing values as an integrity measure. The SMSFA warns that this approach could penalize members for circumstances beyond their control, such as market downturns or temporary spikes in their TSB. For example, consider Sarah, whose TSB increased due to a stock market rally just before the end of the income year, only to drop significantly shortly after. Despite her TSB being below the threshold for most of the year, she would still face Div 296 tax based on the higher value. This raises questions about the equity and fairness of the current proposal.
While Treasury aims to target individuals who withdraw large amounts from superannuation during high-earning years, the SMSFA argues that the proposed method creates artificial elements leading to unintended consequences. They advocate for a fixed TSB test time and suggest that members who have not met full release conditions should not be subject to the greater of opening and closing TSB values.
So, what's the fairest approach? The SMSFA urges the government to consider more equitable alternatives and grants the ATO Commissioner discretion to adjust TSB calculations when the proposed method contradicts policy intent. But what do you think? Is simplicity worth the potential unfairness, or should the government prioritize equity over ease of implementation? Share your thoughts in the comments – this debate is far from over.
