By Colin Lewis, Head of Strategic Advice, Fitzpatricks Advice Partners
April 2026

On 1 July, the new tax on earnings on superannuation balances over $3 million – Division 296 tax – finally starts after 1,219 days in the pipeline.

This quasi-wealth tax – over and above usual super taxes – is levied directly on individuals who pay it personally or by having it released from super to pay – like Division 293 tax.

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

An additional 10 per cent tax is levied on the proportion of earnings on the balance over $10 million.

The $3 million and $10 million thresholds are indexed to inflation in increments of $150,000 and $500,000 respectively.

Here are some things to consider.

1. Effective tax rates

It’s commonly understood that capital gains in accumulation phase are taxed at 10 per cent and people on higher rates are happy with that. But this is the ‘effective’ tax rate derived by applying the actual rate of 15 per cent to two-thirds of the gain on assets held for more than 12 months.

Let’s look at Division 296 in the same vein.

With earnings on the first $3 million not taxed, Division 296 tax on income of say $5 million in super is effectively 6 per cent, on $10 million it’s 10.5 per cent and on $20 million, 17.75 per cent etc.

These rates don’t consider capital gains. Under Division 296, ‘normal’ tax principles apply (with a few tweaks), so gains are discounted by one-third on assets held for more than 12-months.

Consequently, if you have $5 million in super with earnings derived entirely from capital gains, the rate is effectively 4 per cent, on $10 million it’s 7 per cent and on $20 million, 11.83 per cent etc.

The effective rate on earnings with a mix of income and capital gains is between the two, e.g. between 7 and 10.5 per cent for someone with $10 million.

So, tax rates of 15 and 25 per cent are not as bad as they sound and the reason why super will still be the best place for most people to have their retirement savings – especially those with under $10 million.

2. Highest balance at beginning and end of year – with a twist and potential call to action

The proportion of super over a threshold is based on the higher of your total super balance at the start (1 July) and end of year (30 June).

Where your balance is higher at the end of year, you’ll be in scope for Division 296 tax for at least two financial years.

For 2026-27 financial year (first year of operation), a transitional rule applies whereby the proportion of super over a threshold will only be based on your balance at the end of year.

This provides a window to act for those willing and able.

If you’re impacted by Division 296 and eligible to access your super, you have until 30 June 2027, to reduce your balance to minimise the tax or avoid it completely, should you wish.

That’s 14 months away, so there’s no need to panic and rush in now.

3. CGT relief for SMSFs – a call to action

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

For Division 296, asset growth before 1 July 2026, can be protected; resulting in lower earnings as it’ll be calculated on gains built up from that date.

It’s not automatic – SMSFs must opt in for this protection using an approved form lodged by the due date of the fund’s 2027 annual return, i.e. 28 February 2028.

Funds lodging late or without opting in will miss out.

Any SMSF can opt in, including funds with no members having more than $3 million.

So, funds holding assets with large, accrued gains and a member expected to be over $3 million (indexed) in the future, should opt in. Future members will also benefit where pre-July 2026 assets are sold while they’re a member.

The opt in is at fund level, not member or asset level, so SMSFs are all in or out of the relief – you can’t cherry-pick assets; opt in for assets with gains but not assets in a loss position.

Whilst the opt in is made with the 2027 annual return – 22 months away – right now, before the cost base reset on 1 July, examine assets with unrealised losses and consider selling them before that date.

But avoid ‘wash sales’ – a transaction where the dominant purpose is tax, i.e. where you sell an asset and quickly buy it back because you don’t want to cease holding that asset.

4. Division 296 on death  

People who die from 1 July 2027, can still be hit with Division 296 tax with their legal personal representative (LPR) footing the bill.

In the financial year of death, the deceased’s balance at the start of year is used.

Their balance on death is zero, so any life insurance is excluded. It also means Division 296 tax isn’t payable in subsequent years where their death benefit is not finalised in the year of death.

But until their death benefit is paid, earnings in subsequent years will be included in Division 296 tax in the year of death.

This may cause massive problems and inequity with significant estate planning implications.

Estate beneficiaries will suffer where tax assessments are issued to executors and the deceased’s death benefits have been fully paid directly to other beneficiaries, e.g. a blended family where the second spouse receives super but children of the first marriage pay the tax being beneficiaries of the estate.

Fund assets sold to pay death benefits increases Division 296 tax into the bargain.

Executors with limited visibility of the deceased’s super won’t know if they’re up for tax yet and will need to come up with money to pay it.

Where the deceased’s super and estate are distributed before their executor receives a tax assessment, they may have to recover from beneficiaries (the super’s no longer available) to pay the tax.

So, if you’re going to be executor to a will for a wealthy individual, you may wish to reconsider taking on that role given you could be liable for Division 296 tax.

A reversionary beneficiary’s super balance is immediately increased by the deceased’s pension balance and counted at the end of year to determine any tax liability. To avoid this, you could change having a reversionary pension to non-reversionary pension.

Older people contemplating withdrawing super before death so their kids don’t pay ‘death tax’ on inherited super may need to withdraw earlier because withdrawing in the year of death doesn’t avoid Division 296 tax where their balance at the start of year is more than $3 million.

This tax is complex and you should seek professional advice before doing anything.