Division 296 Super Tax Overhaul: What You Need to Know

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Following extensive industry consultation and public feedback, the updated framework introduces a more balanced, progressive, and practical approach.

Background: The Original Proposal

Division 296 was first introduced in 2023 under the “Better Targeted Superannuation Concessions” policy. It proposed an additional 15% tax on earnings from the portion of a superannuation balance exceeding $3 million. Crucially, the original design included both realised and unrealised gains—meaning individuals could be taxed on increases in asset value even if those assets weren’t sold. This drew widespread criticism due to concerns over valuation complexity, liquidity risks, and fairness, especially for SMSFs and those holding illiquid assets.

Key Changes Announced

In response to feedback, the Government has significantly redesigned the measure. The most notable updates include:

• Removal of Unrealised Gains: Only realised earnings—such as interest, dividends, rent, and capital gains—will be subject to the additional tax. This change simplifies compliance and reduces the risk of forced asset sales to meet tax obligations.
• Progressive Tax Structure: A new two-tiered system replaces the flat rate:
  • Balances between $3 million and $10 million: Earnings taxed at 30% (15% base rate + 15% Division 296 charge).
  • Balances above $10 million: Earnings taxed at 40% (15% base rate + 25% Division 296 charge).
• Indexation of Thresholds: Both the $3 million and $10 million thresholds will be indexed annually to reflect inflation:
  • The $3 million threshold will increase in $150,000 increments.
  • The $10 million threshold will increase in $500,000 increments.
• Delayed Start Date: Implementation has been deferred to 1 July 2026, with total super balances assessed as at 30 June 2027. First assessments are expected in the 2027–28 financial year, giving trustees and advisers more time to prepare.
• Defined Benefit Parity: Defined benefit schemes will be treated equitably under the new rules, with Treasury consulting on appropriate calculation methods.

Implications for High-Balance Super Holders

The removal of unrealised gains is a significant win for individuals with large super balances, particularly those in SMSFs. It reduces liquidity concerns and makes the tax more predictable. However, the introduction of a 40% rate for balances above $10 million will further increase the tax burden for those affected.

This change may prompt a reassessment of asset allocation strategies, timing of realisations, and whether certain assets are best held within or outside the superannuation environment.

What’s Next?

While the announcement provides clarity, the legislation is still pending and expected to be released in the coming months. Treasury will continue consulting on key aspects, including how realised earnings will be calculated and attributed.

Our View

The revised Division 296 framework reflects a more pragmatic and equitable approach. The tiered structure and removal of unrealised gains address many of the concerns raised by industry professionals and advisers. However, with higher marginal rates for very large balances, strategic planning remains essential.

For now, SMSF trustees and high-balance members are advised to hold off on making major decisions until further guidance is available. If you’d like to discuss how these changes may affect your personal situation, please contact Blackburn Lazer.