Division 296: A Clearer Path For Large Super Balances

In late 2025, the federal government restructured the proposed Division 296 super tax into a more targeted, progressive measure. While the rules still need to be legislated, the revised design which will become effective on 1 July 2026 with the first tax payable in 2027–28, clarifies who will be affected and how. For most Australians, super remains a highly tax efficient vehicle and the changes primarily affect very large balances. 

What has changed and why it matters. 

Two of the most controversial elements of the original proposal have been removed: 

• Unrealised capital gains are not taxed. Tax will only apply when gains are realised, removing a major complexity and cashflow problem for members. 
• Thresholds will be indexed, increasing over time in line with CPI (via the transfer balance cap framework), reducing the chance of bracket creep. 

Capital gains realised after 1 July 2026 will be measured from that date (not retrospectively), and existing capital gains tax concessions, including the one third discount for individuals will remain relevant to super balances above $3 million. These changes reduce the sting of the reform and give members clearer planning certainty. 

The new progressive tax applies proportionally to the portion of earnings attributable to higher balances: 

• Under $3 million: no Division 296 tax and accumulation earnings remain taxed at 15%. 
• $3 million–$10 million: an additional 15% applies to earnings attributable to the balance above $3 million (an effective 30% on that portion). 
• Above $10 million: a further 10% applies to earnings attributable to balances above $10 million (an effective 40% on that portion). 

Crucially, higher rates apply only to the relevant portion of earnings, not to all earnings, so the incremental tax burden is less severe than many expect. For example, a modest overshoot above $3 million typically results in only a small portion of earnings being taxed at the higher rate. 

Why people under $3 million should still care. 

Even if your balance is below $3 million today there are reasons to pay attention: 

Super balances grow: Even without new contributions, long run returns tend to outpace inflation. Treasury will index the $3 million threshold for inflation, but portfolios can still outgrow that benchmark. If you’re close today, planning now avoids last minute shocks later. 

Couples and survivorship risk: The most common household risk is survivorship. Couples often leave super to the survivor and keep it inside super via a reversionary pension. Two people with $2 million each can become a single $4 million balance on the survivor’s record on death — and Division 296 applies immediately. Importantly, transitional design quirks mean the survivor could be hit with Division 296 tax on a prorated share of the fund’s earnings for the whole year, even if the balance only exceeded $3 million at year end. A death on 29 June can therefore attract tax that wouldn’t apply if the death had occurred a few days later. That timing sensitivity matters for estate planning. 

The bottom line is that the revised Division 296 is more progressive and less punitive than first proposed. For the majority, super remains the most compelling long term tax efficient vehicle. But for households approaching the threshold, couples with sizeable, combined balances and SMSF trustees, proactive modelling and considered decisions in 2026 will materially affect outcomes.  

The legislation is still not final. Planning is sensible and rushed decisions are not. To review your pension and estate planning arrangements or to discuss any other strategies such as phased withdrawals, recontributions, restructure of funds across members, or retaining assets in accumulation vs retirement phase, please reach out to an adviser at Hewison Private Wealth.