Division 296 Explained: How the $3m Super Tax Will Work from 2025

The Policy Rationale

The government argues that superannuation tax concessions should primarily support retirement savings rather than serve as a long-term tax shelter for generational wealth. Treasury projections suggest this measure will generate $2.3 billion in its first full year and approximately $40 billion over a decade.

The tax targets a small but significant group of Australians. According to government estimates, fewer than 0.5% of all Australians—approximately 80,000 individuals—will be affected, with 85% of these being aged over 60.

Who Will Be Affected by Division 296 Tax?

The Division 296 tax applies to individuals whose Total Superannuation Balance exceeds $3 million on 30 June of any financial year from 2025-26 onwards. Importantly, this threshold is calculated per individual, not per fund or per couple, meaning couples can hold up to $6 million in combined superannuation without triggering the tax.

Understanding Total Superannuation Balance

Your Total Superannuation Balance includes all Australian superannuation accounts aggregated across all funds, including:

• Accumulation phase balances in all super funds

• Pension phase balances (including Self Managed Superannuation Fund pensions)

• Balances in defined benefit schemes

• Rollovers in transit between funds

The calculation excludes outstanding Limited Recourse Borrowing Arrangement amounts and structured settlement contributions.

Impact on Different Super Types

The tax particularly affects Self-Managed Super Fund members, who typically hold larger balances and have more control over their investment strategies. However, individuals with balances in Australian Prudential Regulation Authority regulated funds are also subject to the tax if their Total Superannuation Balance exceeds the threshold.

How Division 296 Tax Will Work from 2025

Division 296 operates as a separate tax assessed annually on individuals, distinct from existing superannuation fund taxes. The tax applies only to earnings attributed to the portion of your balance exceeding $3 million.

Key Operational Features

The tax includes several critical components that distinguish it from traditional taxation approaches. Most controversially, it taxes unrealised gains—increases in asset values that haven’t been sold. This means you could face a tax liability on paper profits from property, shares, or other investments held in your superannuation fund.

If your superannuation experiences negative earnings or your Total Superannuation Balance falls below $3 million, no refund is available for Division 296 tax paid in previous years. Instead, losses can be carried forward to offset future Division 296 earnings, though these may never be utilised.

Assessment and Payment Timeline

The Australian Taxation Office will calculate Division 296 tax liability and issue assessments after each financial year. For the 2025-26 year, with a start date of 1 July 2025, the first assessments would be issued after 30 June 2026.

The measurement date is crucial: your tax liability depends on your Total Superannuation Balance at the end of the relevant financial year, not the beginning. This means strategic planning around 30 June each year could significantly impact your tax liability.

How the Division 296 Tax Is Calculated

The Division 296 calculation involves a multi-step process that determines both your superannuation earnings and the proportion subject to additional tax.

Step 1: Calculate Superannuation Earnings
Your superannuation earnings are determined by comparing your adjusted Total Superannuation Balance at the end of the financial year with your Total Superannuation Balance at the beginning of the year (or $3 million if higher).

The calculation adjusts for contributions and withdrawals to capture only investment growth:

• Add back all withdrawals (including pension payments)

• Subtract all contributions (excluding contribution taxes paid by the fund)

• Use the adjusted figure to calculate net earnings

Step 2: Determine the Taxable Proportion
The proportion of earnings subject to Division 296 tax is calculated using the formula:
[(Total Superannuation Balance at year end – $3 million) ÷ Total Superannuation Balance at year end] × 100

Step 3: Apply the Tax Rate
Division 296 tax = 15% × Earnings × Taxable Proportion

Practical Example

Consider Sarah, who has a Total Superannuation Balance of $4 million on 30 June 2026, up from $3.8 million the previous year. Her superannuation earnings are $200,000.

The taxable proportion is: ($4 million – $3 million) ÷ $4 million = 25%
Her Division 296 tax liability would be: 15% × $200,000 × 25% = $7,500

Payment Options and Compliance Requirements

Division 296 creates a personal tax liability separate from your superannuation fund’s tax obligations. You have several options for paying this tax.

Payment Methods Available

Personal Payment: You can pay the tax from personal funds outside your superannuation system. This preserves your superannuation balance but requires available cash or assets.

Superannuation Release: You can elect to have the Australian Taxation Office issue a release authority to your superannuation fund to pay the tax. This reduces your superannuation balance but may be necessary if you don’t have sufficient funds outside super.

Combination Approach: You can use both methods, paying part from personal funds and part from superannuation.

Timeline and Compliance

Members typically have 84 days to pay Division 296 tax after receiving an assessment. The Australian Taxation Office will provide release authority options for those choosing to pay from superannuation, similar to existing Division 293 tax arrangements.

For defined benefit accounts, special rules may allow tax deferral until benefits are actually received.

Key Considerations for Your Financial Planning

Division 296 introduces several important considerations that could significantly impact your retirement planning strategy and investment decisions within superannuation.

The Indexation Issue

The $3 million threshold is not indexed to inflation, meaning more individuals will be affected over time as super balances grow. This lack of indexation has been widely criticised as it effectively lowers the threshold in real terms each year.

Investment Strategy Implications

The tax on unrealised gains may influence how you structure investment options within superannuation. Assets with volatile valuations or illiquid investments may become less attractive due to the potential for tax on paper gains.

Planning Opportunities

Despite the additional tax burden, superannuation remains an attractive investment vehicle for balances up to $3 million. The combination of concessional contribution tax rates and tax-free pension earnings still provides significant benefits compared to investing outside superannuation.

Strategic planning around contribution timing, asset allocation, and balance management around 30 June each year could help minimise Division 296 tax liability.

Preparing for Division 296 Implementation

Division 296 highlights the importance of proactive planning for affected individuals. While the legislation hasn’t been finalised, the re-elected Labor Government has strong support for implementing this measure, likely with Greens backing in the Senate.

Understanding these changes now positions you to make informed decisions about your superannuation strategy. Whether you’re currently approaching the $3 million threshold or planning for future growth, Division 296 will likely influence your retirement planning decisions.

Investment Portfolio Considerations

The tax represents a significant shift in how large superannuation balances are treated, introducing complexity that requires careful consideration of your overall investment portfolio. Working with qualified financial advisors who understand these changes will be crucial for understanding the new landscape effectively.

Seeking Professional Advice

Given the complexity of Division 296 and its potential impact on your financial circumstances, seeking tailored advice from experienced professionals is essential. They can help you understand how these changes affect your particular circumstances, clarify how and when you might need to pay tax, and develop appropriate strategies to manage your tax implications. This is especially important if you have a Self-Managed Super Fund (SMSF), as the way taxable earnings are calculated and the new tax is applied may differ from other superannuation accounts. Professionals can guide you through these details, helping you plan for what this means for your super balance and future tax obligations.

Key Points for Your Consideration

As we await the final law, staying up to date with Division 296 developments will help you adapt your superannuation planning to reduce your tax and protect your money. The new measure is expected to start from 1 July 2025, with the first assessments based on your super balance on 30 June 2026. This means your access to your super accounts and the way you manage your member’s balance will be important as the new rules take effect.

The tax only applies to earnings from the part of your super balance over $3 million, not your entire super balance. The calculation includes all types of earnings, such as capital gains, even if you have not sold the investments. The extra tax is set at a 15-cent tax rate, so careful planning around your super balance can help you manage how much tax you need to pay and keep your money working for your future.

Understanding Division 296 and how it relates to your individual circumstances is key for anyone with substantial super assets. The law may change, and your options for accessing your money could be affected. Taking the time now to review your super accounts and plan ahead will help you make informed choices about your retirement savings.