New significance for existing element

The proposed introduction of the Division 296 tax has given management of the total super balance of a member increased significance. But Accurium head of SMSF education Mark Ellem notes the new impost is not the only reason to prioritise this practice.

The federal government is proposing to introduce an additional 15 per cent tax on individuals with a total superannuation balance (TSB) exceeding $3 million. This proposal brings the importance of accurately understanding, calculating and reporting the TSB sharply into focus for members and advisers alike, not only for compliance, but also for strategic superannuation planning.

Do not disregard this article if you have no SMSF clients with a TSB exceeding $3 million. As outlined below, the TSB is relevant to a broad range of strategies and applies to all superannuation members regardless of balance size.

What is the TSB and how is it calculated?

The TSB is defined in section 307.230 of the Income Tax Assessment Act 1997. It is a measure of an individual’s total interests in the superannuation system as at a point in time, generally 30 June each income year.

Broadly, at the end of an income year, an individual’s TSB is comprised of:

• the accumulation-phase value of all superannuation interests. Generally, this reflects the total ‘withdrawal benefit’ a member would receive if they cashed out their super at that moment (unless a different valuation method is prescribed in regulations),

• the value of retirement-phase accounts or pension balances. For members of an SMSF with an account-based pension (ABP), a retirement-phase transition-to-retirement income stream (TRIS) or a market-linked pension (MLP), these will also reflect the withdrawal benefit the member would receive if they cashed out their super at that moment. Special rules apply for legacy defined benefit pensions,

• rollover benefits not yet allocated to a fund,

• but not any structured settlement contributions.

The TSB aggregates amounts across all superannuation funds and is calculated as at 30 June based on each fund’s annual reporting. Importantly, the TSB is determined using information funds report to the ATO and members have little direct control over the calculation.

Example 1: calculating TSB across multiple funds

Sarah holds $2.1 million in her SMSF and $1.2 million in an Australian Prudential Regulation Authority-regulated fund at 30 June 2025. Her TSB for the 2025 income year is $3.3 million, exceeding the proposed large superannuation balance threshold.

Why is the TSB important?

The TSB operates as a gatekeeper for various superannuation measures, such as a member’s:

• eligibility to make non-concessional contributions (NCC) – individuals with a TSB of $1.9 million or more at 30 June are unable to make further NCCs in the following year (increasing to $2 million for the 2026 income year),

• access to the bring-forward NCC rule –the permitted amount is reduced as the TSB increases,

• entitlement to the government cocontribution and spouse tax offset,

• eligibility to carry forward unused portions of their concessional contributions cap,

• eligibility to use the work test exemption, and

• the ability to use segregation for exempt current pension income (ECPI).

With the upcoming $3 million threshold for the proposed Division 296 tax, the TSB is even more significant. Members approaching this threshold must carefully monitor reported values and consider tax planning, including asset realisation and withdrawal strategies.

How SMSFs report the TSB

Market value reporting

Superannuation Industry (Supervision) (SIS) Regulation 8.02B requires SMSF trustees to disclose fund assets at market value as at 30 June of each income year in the annual financial statements. This means member balances will be based on the reported market value of fund assets. Further, as the SMSF administrative platforms will populate the SMSF annual return (SAR), these values are taken directly from the audited financial statements and reflect the theoretical amount that could be realised if assets were sold on that date.

Market value versus realisable value

This is a crucial distinction because the reported market value ignores tax that would become payable if appreciated assets (such as property or shares) were sold for their reported 30 June market value. Thus, the contingent capital gains tax (CGT) liability on unrealised gains is generally not taken into consideration when reporting for TSB purposes.

Example 2: market value can overstate withdrawal value

John’s SMSF has a single property:

• cost base: $1.5 million

• market value at 30 June: $2.5 million.

If John’s SMSF sold the property, the $1 million unrealised gain would trigger CGT. Nevertheless, his TSB and reported balance would show $2.5 million and not the posttax amount that would be available after sale and available for John to withdraw.

Is the reported figure really TSB?

The legislative definition of the TSB for both accumulation and retirement-phase value refers to the amount the member would have received if they “voluntarily caused the superannuation interest to cease at that time”, that is, for both accumulation and retirement phase, the sum a member would receive if they voluntarily ended their interest at that time. In practice, however, the figure reported is often market value and not a post-tax, realisable withdrawal amount.

ATO SAR instructions state in respect of completing sections F and G in the member information section: “We will use the amount you enter at labels S1, S2, X1 and X2 to calculate the total superannuation balance for each of the members.”

Therefore, the TSB used for all measures, including new taxes, may overstate the true net value, especially where substantial unrealised gains exist and the potential CGT is not taken into consideration.

In relation to label X1, which the ATO will use if completed to determine the accumulation-phase value of an individual’s TSB, the instructions state: “The accumulation-phase value is the total amount of the superannuation benefits that would become payable if the member voluntarily caused the interest to cease. The accumulation-phase value is often less than the value at label S1 accumulation-phase account balance as the costs to cease the interest are subtracted from the account balance.”

Where the accumulation-phase value is less than the member account balance, you can complete label X1 and the ATO will use this lower figure to calculate the TSB.

Should SMSFs adopt tax-effect accounting?

Some in the profession argue for adopting tax-effect accounting in SMSFs, that is, accounting for deferred tax on unrealised gains when calculating member balances. This is my position as it better aligns the reported value with the legislative concept of withdrawal benefit and provides the member with a more accurate value of their superannuation benefits. Dealing with entitlements in disputes such as divorce provides an additional compelling argument for the adoption of tax-effect accounting in an SMSF, but that’s a discussion for another time.

Example 3: tax-effect accounting in practice

Revisiting John’s scenario, let’s say the property’s unrealised gain is taxed at an effective rate of 10 per cent (owned for more than 12 months):

• unrealised gain: $1 million

• estimated tax: $100,000.

Using tax-effect accounting, John’s balance would be $2.4 million (market value less the tax provision) – a figure more representative of his withdrawal benefit. Of course, where the fund did not adopt tax-effect accounting, the lower withdrawal figure could be reported at label X1 in the SAR. But why wouldn’t we let the SMSF administration platform do the calculations, whereby the same figure would be automatically populated at label S1? I acknowledge the calculation of potential CGT is easy for John’s scenario, but SMSFs usually have more than just one asset subject to movement in market value, making a manual calculation significantly more time consuming and prone to human error.

Are there tax-effect accounting risks?

The potential for SMSFs to implement taxeffect accounting when preparing annual financial statements, particularly for the first time, raises legitimate questions about both compliance and the perception of intent under the proposed Division 296 tax regime. Some may be concerned the ATO could interpret a sudden change in approach as a scheme to reduce Division 296 tax exposure or to enable eligibility for contribution caps or concessions that might otherwise be unavailable.

In my view, wholesale adoption of tax-effect accounting on a firm-wide basis, rather than selectively for particular funds or scenarios, is important in demonstrating both integrity and a lack of tax-driven motive. Consistency across a practice evidences a methodological decision rather than an opportunistic measure and aligns with accepted accounting standards, notwithstanding an SMSF is not a reporting entity and is not required to follow such standards.

It is difficult, in my view, to credibly argue that tax-effect accounting, implemented in accordance with stated fund accounting policies, disclosed in the annual financial statements, and on a whole-of-firm basis, would constitute tax avoidance. Rather, the approach seeks to present a more realistic withdrawal benefit, which underpins the legislative definition of the TSB. Properly executed tax-effect accounting reflects the post-tax value a member could withdraw rather than an artificial reduction for tax benefit purposes.

Accordingly, if the underlying rationale for adoption is to align member balances to the legislative intent and definitions underpinning the TSB, as opposed to a reactive response to new tax measures, the ATO would be unlikely to view this as a scheme for avoidance. Open disclosure in financial statement policies and application across all relevant funds further supports the bona fides of this approach. Ultimately, adoption of accounting standards and transparent, consistent firm-wide practice provides professional and regulatory defensibility for adopting tax-effect accounting in SMSFs for the first time.

TSB and non-complying super funds

A further point of complexity arises for members who hold interests in noncomplying SMSFs or other non-complying superannuation funds. The Division 296 tax rules, as confirmed by the explanatory memorandum to the bill, set out two important aspects:

1. Inclusion of non-complying super interests in TSB

For the purposes of determining whether an individual’s TSB exceeds the $3 million threshold, all interests in Australian superannuation funds, including non-complying SMSFs, are counted. This means members with balances in both complying and noncomplying SMSFs must aggregate all these amounts (other than interests in foreign funds) to determine if they are potentially subject to Division 296 tax.

2. Exclusion of non-complying fund earnings from Division 296 tax

Although balances in non-complying SMSFs (or other non-complying funds) are included in the TSB, any earnings related to these interests are excluded from taxable superannuation earnings for Division 296 tax purposes. This recognises that non-complying funds are already taxed on earnings at the highest marginal rate and do not benefit from concessional tax treatment.

Dual treatment Division 296 tax impact

So let’s see how the different treatment of non-complying super fund balances affect member assessment relating to the newly proposed measure.

Example 4: Division 296 tax with noncomplying fund interest

On 30 June 2025, Phil has a TSB of $4.3 million:

• $1.2 million in a non-complying SMSF

• $3.1 million in a complying super fund.

On 30 June 2026, he has a TSB of $4.4 million:

• $1.1 million in the non-complying SMSF

• $3.3 million in the complying fund.

There were no contributions or withdrawals during the year.

• Phil’s basic superannuation earnings is $4.4 million – $4.3 million = $100,000.

• His superannuation earnings disregarding the excluded non-complying interest is $3.3 million – $3.1 million = $200,000.

The lesser of these, the $100,000, is used for Division 296 tax.

• Phil’s TSB above $3 million: $1.4 million.

• Percentage above threshold: $1.4 million/$4.4 million = 31.82 per cent.

• Taxable superannuation earnings: $100,000 × 31.82 per cent = $31,820.

• Division 296 tax liability: 15 per cent × $31,820 = $4773.

For SMSF advisers and trustees, it is vital to be aware of the compounding impact of non-complying fund interests on a client’s overall TSB and potential Division 296 tax exposure even when those earnings are not taxed themselves. Individuals may be liable for Division 296 tax based on complying fund earnings solely due to having their TSB pushed over the threshold by noncomplying interests.

Conclusion

The TSB is fundamental to both the strategic and compliance landscape for SMSF members and advisers, with its significance heightened by the introduction of the $3 million threshold for the proposed Division 296 tax. Accurate and consistent calculation of the TSB is essential, particularly as SMSFs are required to report member balances determined by the market value of fund assets. This can create a mismatch between reported balances and the actual amounts members can access, especially where there are substantial unrealised gains. Further, interests in a non-complying fund can increase a member’s TSB while their earnings remain excluded from Division 296 assessments.

In this evolving environment, it is crucial for SMSF practitioners and trustees to carefully review their own processes for determining and disclosing members’ TSB. Clear communication of these calculation methods and any assumptions made will help ensure all parties understand the true implications for contributions, tax and benefit access, supporting robust and compliant decision-making for SMSF members.