Division 296 Starts in One Week – Here’s What It Actually Means for You

Margaret and David have been clients of ours for over a decade. Both in their mid-sixties, both retired, both comfortable. Their SMSF has been the backbone of a retirement they’ve worked hard to build, and for years, conversations about superannuation tax have been largely academic. The 15% rate inside the fund, yes. Franking credits, yes. But nothing that felt particularly threatening. 

That changed when David passed away eighteen months ago and his account-based pension automatically continued to Margaret as a reversionary pension. His balance of $1.85 million merged with her own $2.3 million. Overnight, Margaret’s Total Super Balance became $4.15 million. 

She is now, from 1 July 2026, subject to Division 296 tax. 

She’s not alone. Across Australia, thousands of people in similar positions are about to encounter a tax they may not have expected, levied personally, on earnings inside super they thought were largely settled. If you have more than $3 million in superannuation, or could end up there, here is what you need to understand before the new regime begins. 

What Division 296 Actually Is 

Division 296 is a new personal tax that sits entirely on top of all existing superannuation and personal income taxes. It is not a replacement for anything. It is an addition. 

From 1 July 2026, it applies to individuals whose Total Super Balance (TSB) exceeds $3 million. There are two tiers: 

• 15% tax on a proportion of your super earnings, the proportion of your balance that sits above $3 million
• An additional 10% tax on the proportion of earnings attributable to any balance above $10 million (making the effective rate on that portion 25%) 

The thresholds are indexed to inflation but will only move in jumps of $150,000 (the $3m threshold) and $500,000 (the $10m threshold), so it may be several years before we see the first increase. 

The critical point most people miss: this is a personal tax. The ATO will calculate it, issue an assessment to you personally, and give you 84 days to pay. It does not go to your super fund’s accountant. It does not arrive alongside your fund’s annual return. It arrives like an income tax assessment, addressed to you. 

How the Tax is Calculated 

The formula is: 

15% × (TSB − $3m ÷ TSB) × super earnings

For someone with $5 million in super, the proportion above $3 million is 40% ($2m ÷ $5m). If their super earnings for that year were $250,000, their Division 296 tax would be: 

15% × 40% × $250,000 = $15,000 

That proportion is recalculated every year, based on whichever is higher, your TSB at the start of the year or at the end. If your balance grows, the higher end-of-year figure is used. If it falls, because you made withdrawals, the higher opening figure still applies. 

This is one of the most important design features of Division 296. Withdrawing money from super after 30 June 2027 will not necessarily reduce your tax bill for that year, because the starting balance is already locked in. 

Year One Is Different — and That Window Is Closing 

The first year of operation (2026/27) has a specific rule that creates a genuine, narrow opportunity. 

For this year only, your Division 296 liability is determined solely by your 30 June 2027 balance. The opening balance (your TSB on 30 June 2026) is not used. This means that if you can reduce your TSB below $3 million by 30 June 2027, through eligible withdrawals, pension commutations, or restructuring you will not be subject to Division 296 tax for 2026/27. 

From 2027/28 onwards, the higher of start or end balance applies. That window closes. 

This does not mean that withdrawing from super is automatically the right answer. What it does mean is that the next twelve months carry more strategic weight than any that follow. 

What “Super Earnings” Actually Captures 

Here is where many people are genuinely surprised. 

You might reasonably assume that if your super is in pension phase, the earnings supporting that pension are also outside the reach of Division 296. That would be a reasonable assumption. It is also wrong. 

Super funds paying pensions are normally exempt from tax on the income and capital gains supporting those pensions. Division 296, however, includes a specific adjustment that effectively adds this exempt income back in. The result is that all your fund’s investment income, whether it was tax-exempt or not, contributes to the super earnings figure used to calculate Division 296. 

In practical terms, a member in full pension phase does not receive meaningfully lower Division 296 earnings than a member in accumulation phase with an identical balance. The pension exemption that has long made retirement phase super so attractive does not protect you from this tax. 

What is excluded from super earnings: 

• Unrealised capital gains: growth in assets your fund hasn’t yet sold does not count.
• Contributions:  Division 296 is purely about investment income
• Non arm’s length income (NALI): already penalised at the top marginal rate, specifically excluded from Division 296
• Pre-2017 deferred capital gains: relating to the 2017 pension reforms, these are excluded 

The SMSF Earnings Calculation 

For SMSFs with more than one member, earnings are not simply split equally. A special actuarial calculation is required that divides the fund’s Division 296 earnings between members based on the average value of each member’s account relative to the fund as a whole throughout the year. 

For example, let’s say Sophie’s account averaged $7 million and Jame’s averaged $2.8 million across a year in which their SMSF earned $500,000, Sophie would be allocated approximately $357,000 in Division 296 earnings (71.43% of the total) and James approximately $143,000 (28.57%). Because James’s balance sits below the $3 million threshold, only Sophie’s portion is subject to Division 296 tax. 

This matters for structuring decisions. Where balances differ significantly within a couple’s SMSF there may be value in reviewing strategies to even up balances over time, subject to contribution caps.  

What to Think About Now 

If your TSB is currently above $3 million, or is likely to reach that level within the next few years, the questions to be working through with your adviser are: 

• What is your projected TSB at 30 June 2027? The first-year window gives specific relevance to this number. If there are structural changes that would reduce your balance below $3 million, and if those changes make sense across your broader financial position, the time to implement them is now.
• Have you reviewed your death benefit nominations recently? Reversionary pensions and death benefit arrangements can have significant and unexpected Division 296 consequences for a surviving spouse.
• Is your SMSF holding long-dated assets with substantial unrealised gains? There is a once-only capital gains relief election available to SMSFs. The decision to elect is irreversible, all-or-nothing, and deadline-driven. We examine this closely in our next article 

A Final Note 

Division 296 is not a catastrophe. For many people it represents a meaningful but manageable additional tax on a genuinely large superannuation balance. The question is not whether to be alarmed, it is whether you have planned thoughtfully and made active decisions, rather than allowing the default outcome to apply. 

That distinction between considered strategy and passive drift is exactly what good advice is for. 

If you would like to review how Division 296 affects your position, we’d welcome the conversation. 

Contact Hewison Private Wealth

This article is general in nature and does not constitute personal financial advice. It does not take into account your individual objectives, financial situation or needs. You should consider whether the information is appropriate to your circumstances and seek professional advice before acting.

Hewison & Associates Pty Ltd T/A Hewison Private Wealth ABN 51 006 082 257 | AFSL 227185