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

There’s a lot of commentary circulating about the government’s proposed new tax on earnings on superannuation balances over $3 million – Division 296 tax – that’s inaccurate and misleading.

The Government has delayed Div 296 legislation until after the Treasurer’s economic roundtable which has a potential outcome for overall higher taxes – softening hostility towards this tax.

There are certainly inherent problems with this tax as currently proposed; namely the proposed $3 million threshold is not indexed – so, more people will be impacted over time – and there’s no tax refund where you pay Div 296 tax and subsequently suffer negative earnings. Negative earnings can only be carried-forward and offset against future positive earnings.

The biggest problem of all is unrealised capital gains are taxed – a first for our tax system.

Unrealised gains (and losses) captured as ‘earnings’ is the movement in super measured by the difference in your balance between the start and end of financial year, adjusted for withdrawals and contributions.

Loan balances in SMSFs with limited recourse borrowing arrangements are excluded to ensure this tax is calculated on net assets only.

Div 296 taxes unrealised capital gains and is separate and additional to fund tax, which taxes realised capital gains.

On the sale of assets, capital gains are taxed in the usual way regardless of whether members have paid Div 296 tax – and there’s no capital gains tax (CGT) credit for Div 296 tax paid.

So, capital gains will be taxed twice.

Then there’s the problem of paying this tax where your asset rich, cash poor, like farmers with low-yielding farms in their SMSF – the demographic hardest hit by this new tax.

But as unpalatable as the way this tax is calculated, it isn’t as bad as some make it out to be, and super will still be the best place for many people to hold their retirement savings.

For a start, the tax rate on super for the rich is not going be 30 per cent (15 per cent on fund earnings plus 15 per cent from Div 296) as often quoted in the media.

The Australian Financial Review recently described it as a “new 30 per cent tax on superannuation balances above $3 million”.

The proposed new tax applies to ‘earnings’, not balances, and Div 296 earnings and fund earnings are two different beasts.  They’re not the same – apples & oranges – so, adding the two tax rates together is like combining cricket and baseball scores.

Importantly, Div 296 tax is 15 per cent on earnings attributable to the percentage of your super at the end of the financial year over $3 million.

So, if you have $5 million, the Div 296 tax rate is effectively 6 per cent, $10 million it’s 10.5 per cent, and $20 million, the effective rate is 12.75 per cent.  Even with $100 million the effective tax rate is 14.55 per cent, not 15 per cent.  This is because earnings on the first $3 million are not taxed.

One podcast called it a “92% tax wipeout”.

This podcast on Bitcoin (BTC) discussed the taxing of unrealised capital gains under this new tax.

It asserted that if you had BTC in your SMSF and held it until retirement in 17 years and sold it at its top each time to pay tax along the way, the SMSF would end up with 8 per cent of its original BTC holding – an alarming 92 per cent having gone in tax.

Putting this to the test

I wanted to see if Div 296 could cause anywhere near this wipeout.

I’ve used Bob not knowing the podcast’s exact assumptions.

Bob only has BTC in his SMSF and he holds it until retirement in 17 years.  BTC goes up 50 per cent per annum – not unrealistic given past returns – and it’s sold at the top each year to fund his Div 296 tax bill and pay the fund’s CGT bill thereon.

On 30 June 2025, the price of a BTC was $165,000 and Bob held 17 BTC in his SMSF valued at $2.805 million.

On 30 June 2026, the price of a BTC has risen to $247,500 and Bob’s super is worth $4,207,500.

Bob’s earnings are $1,207,500 ($4,207,500 – $3,000,000).  His balance at the start of the year is substituted with $3 million to ensure only earnings over this threshold are taxed.

The percentage of Bob’s super exceeding $3 million (the percentage of earnings that are taxable) is 28.70 per cent (($4,207,500 – $3,000,000) / $4,207,500).

So, for the 2025-26 financial year, Bob’s Div 296 tax bill will be $51,980 ($1,207,500 x 28.70% x 15%) which he’ll have released from his SMSF to pay.

Bob’s super grew from $4,207,500 on 30 June 2026, to $6,259,270 on 30 June 2027, but he withdrew $51,980 to pay his Div 296 tax bill (selling 0.14 BTC) and $2,890 to pay tax on the capital gain on the sale of BTC (0.008 BTC).

Bob’s adjusted balance is $6,314,140 ($6,259,270 + $51,980 + $2,890) and his earnings for 2026-27 are $2,106,640 ($6,314,140 – $4,207,500).

The percentage of Bob’s super exceeding $3 million is 52.07 per cent (($6,259,270 – $3,000,000) / $6,259,270).

So, Bob’s tax bill for 2026-27 is $164,540 ($2,106,640 x 52.07% x 15%) which again he’ll have released from super to pay.

This continues for a further fifteen years and numbers get very big as BTC increases 50 per cent annually.

Bob’s paid a hell of a lot in Div 296 tax. And he’s paid CGT on the sale of BTC to fund his Div 296 tax bills and subsequent CGT bills, but he still ends up with 10.3 BTC in his SMSF with a value of nearly $1.7 billion.

In Bob’s case, his SMSF has 60.5 per cent of the BTC it started with – well and truly above 8 per cent.

Ninety-two per cent of the original BTC holding has not gone in tax; only 39.5 per cent – still a large number and entirely due to Div 296.

Over 90 per cent of this loss went in funding Div 296 tax bills which arose entirely from unrealised capital gains. The remainder went in paying CGT from selling BTC to pay his and the SMSF’s tax bills.

Changing the BTC return to 80 per cent per annum, only reduces Bob’s SMSF BTC holding by one – still nowhere near a 92 per cent wipeout.

Regardless, Bob ends up with a massive balance for which the superannuation system was never designed for.

Just be careful of what you hear and read because there’s a lot of misinformation out there about the government’s proposed new tax.

If you think you will be impacted by the proposed new Div 296 tax and wish to know more, please contact one of our Fitzpatricks Advice Partners advisers who can provide you with the most up to date information on this tax.