By Colin Lewis, Head of Strategic Advice, Fitzpatricks Advice Partners
January 2025

Here are 10 things that you need to know about the new tax on earnings on superannuation balances over $3 million:

1. Start date

Division 296 starts on 1 July 2026, instead of 1 July 2025 as originally proposed. So, the first financial year is now 2026-27.

2. New personal (wealth) tax

Division 296 tax is levied directly on individuals who have the option of paying it personally or by having the amount released from super to pay, like Division 293 tax – the extra 15 per cent tax on concessional (pre-tax) contributions for those with combined annual income and contributions exceeding $250,000.

This new tax is in addition to all usual super fund taxes and Division 293 tax which continue to apply in exactly the same way.

3. Two indexed thresholds in play

Division 296 tax is charged at a rate of 15 per cent on the proportion of ‘earnings’ that relates to an individual’s total superannuation balance (TSB) over $3 million.

An additional 10 per cent tax is charged on the proportion of earnings relating to the proportion over $10 million.

Both thresholds will be indexed to inflation (movements in the consumer price index) in increments of $150,000 for the $3 million threshold and $500,000 for the $10 million threshold. It works in the same way as indexation of the transfer balance cap – the limit on the amount of super that can be moved into the tax-free retirement phase.

Example

Sylvia has $15 million in super at 30 June 2027, so:

  • 80 per cent of her super is over $3 million ($15,000,000 – $3,000,000 / $15,000,000), and
  • 33 per cent of her super is over $10 million ($15,000,000 – $10,000,000 / $15,000,000).

In 2026-27, Sylvia’s “share” of her fund’s taxable income is $500,000.

Sylvia’s Division 296 tax bill will be $76,665 (15% x 80% x $500,000 + 10% x 33.33% x $500,000).

Remember, the fund has already paid 15 per cent tax on its taxable income.

4. Effective tax rates

The Government’s ‘headline’ tax rates of 30 per cent for those with a TSB between $3 million and $10 million, and 40 per cent for those with a TSB exceeding $10 million are derived by simply adding together the usual super tax rate of 15 per cent with the new tax rates.

But the new tax rates are applied proportionally to earnings over these thresholds, so they’re not as bad as they sound and the reason why super may still be the best place for most people to have their retirement savings – especially those with under $10 million.

For example, if you have $5 million, the Division 296 tax rate is effectively 6 per cent, $10 million it’s 10.5 per cent, $15 million it’s 15.33 per cent, and $20 million, 17.75 per cent. Even with $100 million, the effective tax rate is 23.55 per cent, not 25 per cent. This is because earnings on the first $3 million are not taxed.

5. Highest balance at beginning and end of year

The proportion of super over a threshold is based on the higher of an individual’s TSB at the start (1 July) and end of year (30 June) – originally, it was only on the TSB at the end of year (30 June).

This new (clever) integrity measure stops people, eligible to access their super, from taking money out during the year to avoid paying the tax – something that could’ve been done under the original proposal.

6. 12-month transition period – there will be a call to action

In 2026-27, the first financial year of operation, a transitional rule applies whereby the proportion of super over a threshold will only be based on an individual’s TSB at the end of year, i.e. 30 June 2027.

So, for people who will be impacted by Division 296, eligible to access their super and wish to reduce their balance down below a threshold to either minimise this tax, or avoid paying it completely, have until 30 June 2027, to do so.

7. Normal tax principles

Earnings will be based on a super fund’s taxable income and calculations will be “closely aligned to existing tax concepts”.

As the exact calculation of a member’s taxable income is difficult for super funds other than self-managed super funds (SMSFs) and small APRA funds (SAFs), i.e. public offer (retail and industry), corporate and public sector funds, they will be able to ascertain a figure that’s “fair and reasonable” rather than having to report the exact amount for a member.

Importantly, earnings will not include unrealised capital gains.

Taxable income will be adjusted for concessional contributions and exempt current pension income (ECPI), but not withdrawals. It’s assumed that funds will need to calculate their ECPI and add that to taxable income when reporting realised earnings to the Australian Taxation Office (ATO).

Generally, only realised capital gains accrued from 1 July 2026 onwards will be taxed (refer point 9 below).

The one-third discount applying to capital gains on assets held for more than 12 months will continue to be applied to accounts worth more than $3 million.

Realised earnings will be determined by super funds – the ATO identifies individuals subject to Division 296 tax and requests this information from funds.

8. Splitting Division 296 earnings between members

Once a super fund has calculated its overall earnings, it will need to split that amount between members as Division 296 tax is a personal tax calculated at the individual level.

For SMSFs and SAFs, the precise method will be set out in still to be released Regulations, but Treasury has said there will be a need for an actuarial certificate – like the one already required for many pension funds.

But not all SMSFs and SAFs with members impacted by Division 296 tax are in retirement phase, so some accumulation funds may find they’ll need an actuarial certificate for the first time. Hopefully sense prevails that not every fund needs to obtain an actuarial certificate, e.g. single member funds wholly in accumulation or retirement phase for the whole year.

Treasury has said that SMSFs holding specific assets for specific members will be required to use the same method as all other funds.

Again, funds other than SMSFs and SAFs will use a different approach – they will be required to allocate Division 296 earnings in a “fair and reasonable” way between members.

9. CGT relief for SMSFs & SAFs – there will be a call to action

Super funds pay 15 per cent tax on two-thirds of realised capital gains on assets held for more than 12 months.

Under Division 296, the growth in assets built up before 30 June 2026 can be protected. So, earnings for Division 296 tax will be less as the assessable capital gain will only be two-thirds of the gain built up from 1 July 2026, but this is not automatic.

SMSFs and SAFs wishing to take advantage of this protection need to opt in using a yet to be released ‘approved form’ which must be lodged by the due date of the fund’s 2026-27 annual return. Funds that lodge late and funds that lodge their return without specifically opting in will miss out.

Importantly, any SMSF or SAF can opt in, including ones with no members having more than $3 million in super at 30 June 2026. Accordingly, it may be worthwhile for a fund to opt in that has assets with large, accrued gains and a member(s) expected to be over $3 million in the future.

The opt in is at a fund level, not member or asset level. So, funds are either all in or out of the relief – they can’t choose to opt in for some assets but not others, e.g. assets in a loss position.

It means future members joining a fund that opted in will benefit where pre-July 2026 assets are sold while they’re a member.

10. Negative earnings

There’s no tax refund where you pay Division 296 tax and subsequently suffer negative earnings.

Negative earnings can only be carried forward and offset against future positive earnings.

Observations

As with many things, the devil is in the details, and there’s an awful lot of detail still to come with this new look Division 296.

One issue is whether total superannuation balance (TSB) will be redefined.

Under the original proposal, TSB was used in calculating ‘earnings’. Whilst this is no longer the case, it determines whether an individual will be exposed to Division 296, i.e. if they’re above the $3 million or $10 million threshold.

The Government was changing the rules affecting people with defined benefit pensions.

It was going to redefine TSB, removing the link to transfer balance account (TBA) – the ATO account that keeps track of amounts moved into (and out of) retirement phase.

Currently, the TBA value of a defined benefit pension is used for TSB to avoid those pensions having to be valued annually. Instead, defined benefit pensions were to include the family law value for their TSB – a good thing as it would lower the value placed on defined benefit pensions.

From an equity perspective, it’s important that this change still happens as it places a reasonable value on a person’s TSB.

Take someone aged 85 years with a lifetime pension. It’s unfair to use their current valuation based on a multiple of 16 instead of a valuation based on a life expectancy of six years – which could make the difference in whether they’re going to be subject to Division 296 or not.

Finally, people do not need to panic and rush into action, especially as Division 296 is still not finalised – industry consultation has only just closed.

Under the original proposal, where unrealised capital gains were to be taxed, we saw people rushing in and pulling money out of super when they didn’t need to do it.

People eligible to access their super now and up to 30 June 2027, have until that date to reduce their super balance under the transitional rule to minimise the impact of the tax or to avoid paying it completely – that’s 17 months away!

And people ineligible to access super before then can’t do anything anyway. But there are strategies already being developed that may be used from then – beyond the scope of this paper – to minimise the impact of Division 296 tax.

The only thing to consider now is whether to direct additional savings into super as opposed to alternative tax structures like discretionary (family) trusts, private companies and investment bonds.

But this may come with its own set of problems.

The ATO has intensified its focus on family trusts, targeting reimbursement agreements (Section 100A), income splitting of personal services income, and compliance with family trust elections. Its concerns include income being distributed to low-tax beneficiaries who don’t receive the funds, using trusts to mask income from personal efforts, and non-compliance with the 47 per cent penalty tax on distributions outside the family group.

Superannuation may still be the best place for most people to have their retirement savings.