Div 296 requires fixing before finalisation: Industry

Industry bodies have raised concerns over the drafted Division 296 regulations, warning the current design could create unnecessary complexity, higher compliance costs and unfair outcomes.

The bill passed the Parliament last month, and was followed by a consultation to seek feedback on the taxation regulation for Division 296.

Contributing to the consultation, the Institute of Financial Professionals Australia (IFPA) said it is concerned about the treatment of deceased estates, the lack of clarity around actuarial certification, and the attribution formula for small super funds where reserves exist.

IFPA said the proposed deceased estate rules are "impractical" and may delay estate administration, causing a deceased member's final Division 296 position to remain unfinalised longer after death, subsequently encouraging executors to keep estates open for longer and delay final distributions to beneficiaries due to the delayed assessment.

Hence, it is recommending replacing the current "single final assessment" approach with an annual assessment model for post-death periods to allow the Div 296 liability to be assessed progressively.

Meanwhile, the regulations failed to clearly state whether the actuary is expected to certify a final dollar amount, a percentage, or an attribution methodology, IFPA said, advising Treasury should clarify that the actuary may certify an apportionment percentage or methodology once the fund's Division 296 fund earnings are known for more consistent actuarial processes.

In addition, IFPA warns the small fund attribution formula may produce distorted outcomes where reserves exist, because reserves do not have a total super balance (TSB) value but may still contribute to fund earnings.

"For example, where a fund has one member and a reserve, the reserve may contribute to fund earnings but not to the denominator, because it is not itself a superannuation interest with a TSB value," the submission explained.

"This could result in the member being attributed earnings economically associated with the reserve, even though the member may have no entitlement to it.

"That is an unfair outcome."

IFPA senior technical services specialist Stuart Sheary said the current form of the regulation raises several practical and fairness concerns.

"Treasury should revisit these rules, so the tax outcome is more timely, workable and aligned with the person who ultimately receives the benefit," Sheary said.

"Our submission outlines sensible amendments that would improve fairness, reduce compliance friction and make the regime more workable in practice.

"In our view, the proposed rules dealing with deceased members, actuarial certification and small fund attribution risk creating unnecessary complexity, higher compliance costs and inequitable outcomes."

Meantime, the SMSF Association also worries the current design may pose risks that can create "unworkable" outcomes for self-managed super fund (SMSF) members.

SMSF Association chief executive Peter Burgess has met with Treasury to push changes on the regulation on separate topics.

Burgess said the treatment of post-death earnings represents a material expansion of the regime that has not been subject to appropriate scrutiny.

"By extending tax liabilities beyond death you create a scenario where liabilities can arise years later, after an estate has been finalised, leaving executors and beneficiaries exposed without access to the underlying superannuation assets," Burgess said.

He also warned that the proposed attribution rules risk producing arbitrary and unfair outcomes for SMSF members.

"Members could be taxed on earnings they have never received - and may never receive," Burgess said.

"That includes situations where earnings are attributed from reserves or from periods where an individual was no longer even a member of the fund.

"These are not marginal cases - they are real, foreseeable scenarios that undermine the integrity of the regime as a personal tax."

Overall, Burgess said the discussion with Treasury was constructive, with a shared focus on ensuring the rules are workable in practice. It said it will continue to work and push for workable solutions.