What You Need to Know About the Proposed Division 296 Superannuation Tax

The Federal Government has introduced legislation proposing a new tax – Division 296 -that may significantly impact individuals with larger superannuation balances. This measure is part of the broader initiative to ensure superannuation concessions are better targeted and sustainable.

What is Division 296?

If passed, Division 296 will impose an additional 15% tax on earnings associated with superannuation balances exceeding $3 million, starting from 1 July 2025. This means affected individuals will face a total tax rate of 30% on a portion of their super earnings.

Why SMSF Trustees Should Pay Attention

• Applies to Unrealised Gains: Which is particularly relevant for SMSFs holding property, other illiquid assets, or shares investments with large unrealised gains.
• Threshold is Not Indexed: The $3 million cap is fixed, meaning more individuals may be affected over time due to inflation and investment growth.
• Per Individual, Not Per Fund: The threshold applies to each individual’s total superannuation balance across all funds.
• Valuation is Key: Accurate asset valuations as of 30 June each year will be critical for compliance and tax calculation.

Frequently Asked Questions

Q: How is the $3 million threshold calculated?

It’s based on your Total Superannuation Balance (TSB) across all funds as of 30 June each year starting from 30 June 2026. Adjustments are made for the contributions and withdrawals made during each year.

Q: Will I be taxed on unrealised gains?

A: Yes. The proposed method includes unrealised gains in the earnings calculation, even if no assets are sold.

Q: Can my SMSF pay the tax?

A: Yes. You can elect to pay the tax personally or nominate your SMSF to pay it on your behalf.

Q: What if I have multiple super funds?

A: The ATO will aggregate your balances across all funds to determine your TSB.

Q: What happens if my fund has a negative return?

A: Negative earnings can be carried forward to offset future Division 296 earnings.

Step-by-Step Division 296 Tax Calculation

Step 1: Determine Whether Your Superannuation Balance Exceeds $3 Million
At 30 June each year, if your total super balance exceeds $3 million, Division 296 applies.

Step 2: Calculate “Earnings” for Division 296
Not your typical income—Division 296 defines earnings as:
Earnings = Change in total super balance – Contributions + Withdrawals
This includes unrealised gains.

Step 3: Determine Proportion Above $3 Million
Proportion = (Total Super Balance – $3 million) / Total Super Balance

Step 4: Multiply Earnings by the Proportion
Taxable Earnings = Earnings × Proportion Above $3m

Step 5: Apply the 15% Division 296 Tax
Division 296 Tax = Taxable Earnings × 15%

Examples

Example 1 – No Contributions or Withdrawals
Opening balance: $5 million
Closing balance: $5.5 million
Contributions/Withdrawals: $0
Earnings = $500,000
Proportion above $3m = 45.45%
Taxable earnings = $227,250
Division 296 tax = $34,087.50

Example 2 – With Contributions
Opening balance: $3.2 million
Closing balance: $3.5 million
Contributions: $30,000
Earnings = $270,000
Proportion above $3m = 14.29%
Taxable earnings = $38,583
Division 296 tax = $5,787.45

What Should You Do Now?

• Review your current and projected super balances.
• Ensure your SMSF assets are accurately valued.
• Consider the impact of unrealised gains on your tax position.
• Discuss estate planning and contribution strategies with your adviser.

30 June 2026 is the date where your balance needs to be under $3 million to avoid the application of Division 296 tax – in any case, our initial analysis indicates (that whilst this is a new tax and it’s not as good as current rules) the alternatives in many cases are not any more attractive. We note that some super funds with lumpy assets such as high value properties may be adversely affected – please contact your adviser.

We’re Here to Help

If you believe you may be affected or would like to understand how these changes could impact your SMSF, please contact us at ge********@***************om.au or 02 9415 1511 to arrange a personalised review.

Want to better understand Division 296?

We’ve broken it down in a short video to help you grasp what’s changing and how it could impact you.