Division 296 Superannuation Changes

Key Points:

Updated Division 296 Rules: Starting 1 July 2026, a tiered tax will apply solely to realised superannuation earnings exceeding $3 million — resolving major concerns about the taxation of unrealised gains.

More Equitable and Indexed Framework: The thresholds of $3 million and $10 million will be indexed in line with inflation, helping to limit long-term impacts on members and promote fairness for those in defined-benefit schemes.

Need for Strategic Preparation: Members with large balances and SMSF trustees should assess their cash flow, investment arrangements, and succession strategies to adapt effectively to the upcoming Division 296 tax system.

Implications for High-Balance Members and SMSF Trustees

The Federal Government has announced important updates to its Better Targeted Superannuation Concessions initiative (Division 296) — a reform aimed at reducing superannuation tax concessions on balances exceeding $3 million, but with a more measured and practical approach.

While the changes reflect some response to industry concerns, the revised Division 296 framework only partially resolves the challenges highlighted by SMSF trustees and advisers. As a result, many members with higher balances are still expected to encounter increased tax obligations and compliance complexities.

What’s Changing

Starting 1 July 2026, Division 296 will introduce a tiered tax system on realised superannuation earnings for individuals whose total super balance (TSB) exceeds $3 million, as assessed on 30 June 2027:

• Balances up to $3 million: Earnings will continue to be taxed at the standard 15% rate.

• Balances between $3 million and $10 million: A total concessional tax rate of 30% will apply.

• Balances above $10 million: Earnings will attract a total concessional tax rate of 40%.

Key refinements include:

-Focus on realised earnings: The tax will now apply only to realised (not unrealised) superannuation earnings, bringing it in line with existing income tax principles.

-Indexed thresholds: The $3 million and $10 million limits will be indexed to inflation, ensuring they move in step with changes to the Transfer Balance Cap.

-Delayed commencement: The start date has been pushed back one year to 1 July 2026, allowing additional time for industry consultation and the completion of legislation.

-Defined-benefit alignment: Comparable treatment will be developed for defined-benefit scheme members, promoting fairness and consistency across all fund types.

Why It Matters

The revised approach delivers a fairer balance between preserving the concessional nature of superannuation and ensuring the system’s long-term sustainability.

The previous proposal to tax unrealised gains posed major cash flow and valuation challenges for SMSFs — especially those with property, private investments, or business assets. That plan has now been abandoned, a move the SMSF Association hailed as “a day for the SMSF sector to savour.”

The National Tax & Accountants’ Association (NTAA) and other professional bodies have also welcomed the revision, viewing it as a practical improvement and a reflection of the profession’s strong advocacy efforts.

Practical Implications for SMSF Trustees

Although the removal of unrealised gains from the Division 296 framework is a welcome improvement, members with larger balances will still need to plan carefully and review their strategies:

• Tax modelling and cash flow: Understand how the new two-tier tax system affects your after-tax returns. These changes may influence decisions around asset sale timing, contribution strategies, and liquidity management.

• Structure and succession planning: Reassess whether the assets held within your super fund remain appropriately structured considering the new tax rates and thresholds.

• Defined-benefit schemes: If you’re part of a defined-benefit fund, keep an eye on Treasury’s consultation process to confirm how equivalent treatment and valuation methodologies will apply.

• Benefit of indexation: Because thresholds will be indexed to inflation, fewer members should be drawn into Division 296 over time purely due to inflationary growth or compounding returns.

Examples

• A member with a $4.5 million super balance and $300,000 in realised earnings will pay Division 296 tax only on the portion of earnings tied to the $1.5 million exceeding the $3 million threshold — equating to $15,000 in additional tax.

• A member with a $12.9 million balance and $840,000 in realised earnings would incur roughly $115,000 in Division 296 tax. Even at this level, their effective tax rate remains concessional compared with personal marginal rates.

  
  

Next Steps

• Treasury consultation will continue through 2026 to finalise the calculation and allocation of realised earnings.

• The first Division 296 assessments are expected to be issued in the 2027–28 financial year.

• Affected individuals will be notified by the ATO and may choose to pay the liability personally or via their super fund.

  
  

What to Do Now

The latest refinements to Division 296 strike a sensible balance, maintaining confidence in Australia’s superannuation system while promoting fairness and sustainability.

For high-balance members, now is the ideal time to:

• Review projected super balances and investment strategies.

• Assess liquidity needs in anticipation of realisation-based taxation.

• Seek specialised advice to optimise structure, timing, and tax outcomes.

Source: Treasurer Jim Chalmers, Media release, 13 October 2025 (Treasury). Additional reporting: Reuters. ministers.treasury.gov.au