Superannuation Update: Division 296 Tax

Superannuation Update – Division 296 tax

Australia is on the cusp of a major shift in how it taxes superannuation with Treasurer Jim Chalmers adamant that the Labor Party will proceed with Division 296. The introduction of Division 296 is essentially a reform to impose an extra 15% on certain member’s superannuation balances.

The purpose of this note is to introduce some of the high-level technical aspects of the proposed changes associated with this new superannuation tax regime. Although the ATO will be tasked with the complex calculations associated with Division 296 tax, given the significant attention this issue is attracting, we trust this provides further clarity on some of the important details and relevant concepts.

What Is Division 296?

Effective from 1 July 2025, Division 296 aims to reduce the tax concessions afforded to individuals with large super balances. It targets those whose Total Superannuation Balance (TSB) exceeds $3 million at the end of a financial year and whose superannuation has increased in value during that year.

How would it work?

If it’s introduced as proposed, Division 296 tax will be a brand new tax that is related to superannuation however is completely separate (and on top of) all existing fund and personal taxes. The Government intends to apply this tax from 2025/26 onwards. In any given financial year, it will only apply to individual members that have more than $3m in super at the end of the year (i.e., 30 June 2026 for the first year of operation, 2025/26).

It will be a personal tax – i.e. the tax bill will initially go to the individual not their super fund.

Individuals will have 84 days to pay the tax but they can choose how they pay it. They can pay their Division 296 tax personally or elect to have the money released from their super fund. Even those who can’t normally access their super yet (because they’re too young) can elect to have this tax bill paid from their super.

Total Super Balance (TSB)

Division 296 tax depends on how much an individual has in super – so this is a critical figure. The technical term for it is “total superannuation balance” (or TSB). For most, it’s just the amount that shows on our superannuation member statement each year (or adding up several member statements for those who have super in multiple different accounts or funds).

What is the proportion?

The tax will apply to only the proportion of the member’s superannuation earnings that exceed a balance of $3m (rather than all of the earnings).

For example, Kim’s total superannuation balance (her TSB) at 30 June 2026 is $4m.  The proportion of Kim’s earnings in 2025/26 that is subject to the Division 296 tax is calculated as:

($4m – $3m) ÷ $4m = 25%

Importantly, when it comes to calculating this proportion, it doesn’t matter if the member’s TSB was less than $3m at the start of the year. It is only the end of year figure that impacts how much of their fund earnings are subject to the Division 296 tax.

How does the ATO work out the ‘earnings’?

“Earnings” for the purpose of the Division 296 tax doesn’t just include the income the superannuation fund would normally pay tax on – things like interest, rent, dividends or capital gains on assets it’s actually sold. “Earnings” for Division 296 tax includes

• everything that causes the member’s account balance to go up (less contributions) – including increases in the value of the assets their fund holds even when it hasn’t sold anything (i.e. unrealised capital gains).
• less anything (apart from withdrawals) that makes their balance go down.

For example, Kim’s super increased from $3.65m to $4m during the year. She didn’t make any new contributions, and she didn’t take any money out of her fund (such as pension payments). The growth in Kim’s balance all came from growth in the fund’s assets and income such as interest, rent and dividends. Her “earnings” for Division 296 tax would be $4m less $3.65m, i.e. $350,000.

Importantly, this is all of the growth in Kim’s total super balance (TSB) – even growth from unrealised gains in her fund’s assets.

Under this scenario, Kim’s Division 296 liability is estimated to be $13,125 (approx.)

Considerations and next steps

It is early days still and it is expected to take several months for the relevant bill to become law. Please note that for the purpose of this article, there are many additional layers to the proposal and varying ‘what if?’ scenarios that have not been covered.

Although Superannuation is essentially being taxed more under Division 296, it is still generally the most tax effective investment vehicle, especially for individuals with balances up to $3m. We caution against wholesale changes at this stage including strategies to move large illiquid assets out of Superannuation whereby Capital Gains Tax and Stamp Duty could be costly. Furthermore, tax associated with holding certain assets outside Superannuation must also be considered.

We’ll continue to closely monitor the legislative environment before recommending any specific changes to your individual circumstances at the appropriate time. If you have any questions, please don’t hesitate to contact your Adviser directly.