What’s changing?

There’s an entirely new definition of total super balance which will impact several groups of people. (Note – there’s also a modification to this definition which is specific to Division 296 – we’ll talk about that at the end. But initially, we’ll focus on the change that applies to everyone.)

Defined benefit pensioners

Those with retirement phase pensions historically had their total super balance worked out in quite a convoluted way that was based on their transfer balance account. For the majority of people, whose retirement phase pensions are conventional account-based pensions or even market-linked pensions, subsequent adjustments meant that the value ended up being their account balance in that pension. But anyone (even in an SMSF) with a defined benefit pension had a different outcome – their total super balance was permanently set at the value of their pension when it started.

This led to some crazy results – since lifetime pensions for that purpose were valued as simply 16 times the initial pension payment (which often bore little resemblance to the actual worth of the pension).

If the Division 296 changes are legislated, this will change from 30 June 2025. At that point the value will be calculated more accurately – using the valuation method that would be used under the family law legislation if the member was getting divorced or similar factors set by the fund itself.

For SMSFs, this means:

• It will be necessary to calculate this for any defined benefit pensions being paid from the SMSF – previously it wasn’t.
• Advisers and accountants looking to help people with non-SMSF-defined benefits understand their total superannuation balance (perhaps for contribution purposes) won’t be able to use the 30 June 2024 value as a guide. They will need to wait for the providing fund to calculate (and report) the 2025 value. It could be much higher or lower than the previous value.

Of course, many people with one of these pensions are also no longer making contributions to super that depend on total super balance but some are. This change will impact them even if the Division 296 tax does not.

Anyone with excess transfer balance earnings

Currently, anyone with excess transfer balance earnings (i.e. they’ve gone over their transfer balance cap) has those earnings permanently included in their total super balance. This is the case even after they’ve fixed the problem pension that gave rise to the excess in the first place – for example, by rolling some of it back to the accumulation phase.

Removing the link between the transfer balance cap and the total super balance will mean this stops. For most people, it’s a technicality:

• Very few people ever actually have excess transfer balance earnings – they tend to make sure they don’t go over their transfer balance cap in the first place.
• Those who do tend to have too much super to be making non-concessional contributions in any case.

But for some, it’s relevant – for example, people unwinding market-linked pensions often find these earnings are created as part of the process.

Defined benefit members with accumulation interests

The last group – and probably the most impacted – will be those with defined benefit interests in the accumulation phase. Previously the value placed on these very much depended on the rules of the particular fund and in some extreme cases, the value was nil.

Under the new rules, if implemented, a method more like the family law rules will generally also be used for these interests.

This is the change likely to have the most impact and prevent some people who can currently make non-concessional contributions or use other opportunities like the “catch up” concessional contribution rules from doing so in the future. Again it means advisers and accountants need to be particularly careful about using the 30 June 2024 figures as a guide to total super balance for 30 June 2025 as it may change significantly.

I thought LRBAs were going to be excluded from the total super balance

They are – but only for Division 296 purposes. For everything else, including non-concessional contributions, the treatment of outstanding loan amounts under a limited recourse borrowing arrangement will be unchanged. They will be “added back” to a member’s super balance if the loan arrangement started after 1 July 2018 and either:

• It’s from a related party.
• The member has met a full condition of release (no matter who provided the loan).

Certainly, total super balance is an important number and impacts many things. Some of these changes will come earlier than expected (30 June 2025) and impact far more than just the Division 296 tax.