Superannuation Shake-Up: Navigating the Division 296 Tax

Written By James Watson – CA SMSF Specialist 

📌 What Is Division 296?

The Australian Government is proposing introducing a new tax measure—Division 296—as part of its efforts to make superannuation concessions more equitable. This legislation targets individuals with superannuation balances exceeding $3 million, and it’s set to take effect in the next financial year, the first testing point for the proposed tax will be 30 June 2026.

💼 Who Will Be Affected

If your total superannuation balance (TSB) exceeds $3 million at the end of a financial year, you’ll be subject to this new tax. This includes all your super accounts, including defined benefit interests (with special valuation rules).

📊 How Does the Tax Work?

Here’s a breakdown of how Division 296 will be applied:

• Tax Rate: 15% on earnings related to the portion of your super balance over $3 million.
• Earnings: Calculated as the change in your TSB over the year, adjusted for contributions and withdrawals. The 15% proposed tax is in addition to the 15% currently payable on earnings attributable to any of your member balance in accumulation phase. (So total tax rate potentially up to 30%).
• Proportional Taxation: Only the earnings attributable to the excess over $3 million are taxed.
• Unrealised Gains Included: Yes, even if you haven’t sold the asset, the gain is still taxed.

🧮 Example Calculation

1. Earnings = (TSB at year-end + Withdrawals – Net Contributions) – TSB at year-start
2. Proportion = (TSB – $3M) ÷ TSB
3. Tax = 15% × Earnings × Proportion
   
   

⚠️ Why Is It Controversial?

Unrealised Gains: Taxing gains that haven’t been realised is a major departure from how our taxation system operates and it likely to cause many unintended consequences for taxpayers.  It is likely to create cash flow issues, especially for SMSFs with property or other illiquid assets. For example, a farmer who owns a farm in super who has a balance over $3 million, if that property rises in a particular year on paper, they will be taxed on these paper gains. Where does the money come from to fund the tax? (Particularly if they can no longer contribute to the fund).

No indexation: Whilst the Government believes these rules will only affect a small percentage of taxpayers, the $3 million cap is (at this point) not going to be indexed, meaning it will capture additional taxpayers as time progresses.

Legislative Uncertainty: As of May 2025, the bill is still under Senate review. The Greens are pushing for a lower threshold, which could broaden the tax’s reach.

❓What Can You Do?

If your super balance is approaching or exceeds $3 million, you will need to consider:

• Reviewing your superannuation structure.
• Ensuring accurate asset valuations.
• Strategically planning contributions and withdrawals.

🧠 Potential Strategies

Sit and wait: The first testing point for the proposed tax is 30 June 2026, meaning if your balance is less than $3M at this time you will not be subject to the proposed rules.

This means there is still sufficient time to employ strategies closer to this date and achieve the desired outcomes.

It is also important to remember that if you are subject to this tax, once you withdraw monies from the superannuation system you have limited ability to make further contributions.

Adjust your investment makeup: You could look at the makeup of your overall portfolio with an aim to hold income generating assets via super which are less prone to market movement and growth assets in alternative structures such as a trust or company.

This consideration would be especially important for those who cannot access their super balances yet (under age 60) as you don’t have the option to withdraw funds if you are approaching the $3M cap.   

For those who have met a condition of release and are able to access monies in super they could adjust their asset mix to make the fund more liquid to allow withdrawals as required to remain under the cap whilst maintaining as much in super as possible.

Withdraw monies and invest via alternate structures: Depending on where the funds are deployed after withdrawal from super you may still achieve a better overall outcome by paying the Div 296 tax – this would need to be analysed as part of overall investment structure and tax exposure. Investing via an investment company for example allows you to cap your tax exposure at 30% on income and ‘realised gains’.

Withdraw monies to gift to children or family members ‘early inheritance’: Whilst we don’t have a ‘death tax’ perse in Australia, superannuation benefits bequeathed to non-dependent beneficiaries can be subject to tax.

Subject to a few exceptions, adult children are generally classed as non-dependents.    

Since 2007, superannuation death benefits paid to non-tax dependants as a lump sum are taxed in the following manner;

The tax-free component of the death benefit is tax-free

The taxable component is taxed at:

• • taxed element – 17% (including Medicare); and
  • untaxed element – 32% (including Medicare)

The most common tax rate applicable in the above scenario is 17%, if you have claimed personal tax deductions along the way for personal superannuation contributions or had amounts contributed by your employer during your working life it is highly likely that your member balance contains a taxable component.

So it is worth knowing what this is as you may be able to reduce this as part of a withdrawal strategy and give yourself comfort that you won’t donate a portion of your super to the government once you are not around.

📝 Final Thoughts

Division 296 represents a significant shift in how high super balances are taxed in Australia. While it aims to improve fairness in the system, it also introduces complexity and potential liquidity challenges. Stay informed and consult with us in conjunction with your licensed financial advisor to discuss further and prepare for the changes ahead.

Disclaimer

This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, WLF Accounting & Advisory and its related entities, does not accept any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. Any tax considerations outlined in this publication are general statements, based on an interpretation of the current tax law, and do not constitute tax advice.  The tax implications of super investments can impact individual situations differently and you should seek specific tax advice from us as your registered tax agent or registered tax (financial) adviser.