Key points
- The Federal Government has released draft legislation for their redesigned tax on earnings for people with more than $3 million in super.
- The draft legislation is currently undergoing a consultation process and may change and further detail is still to come on some elements.
- The start date for Division 296 tax is 1 July 2026 with the first assessments calculated based on super balances and earnings for the year to 30 June 2027. Transitional measures applying to the 2026-2027 financial year will mean there is still time to consider and plan for the potential impacts of the new tax.
- You should speak with an advisor before making any changes as a result of the draft legislation. Not acting ahead of finalised legislation has proved to be the right approach to this point.
Division 296 tax – what the draft legislation confirms
The draft legislation confirms that:
- the new tax will be assessed to the individual – with an option to release amounts from super to pay the liability. Existing taxes applying to super funds remains unchanged,
- the tax will be applied to ‘realised earnings’,
- there will be two tax thresholds – a $3 million threshold and a $10 million threshold, both thresholds will be indexed in line with CPI,
- there will be a cost base adjustment available for Division 296 purposes effectively resulting in capital gains prior to 1 July 2026 being excluded, and
- there will be special valuation rules for defined benefit interests.
Restructuring your super in response to Division 296
The draft legislation introduces what the Government refers to as an “integrity measure” to ensure an individual cannot avoid Division 296 by reducing their total super balance prior to the end of an income year.
Under the previous proposal, a person could ensure they would not be liable for Division 296 tax by reducing their total super balance to less than $3 million prior to the end of the income year.
Under the draft legislation released, the proportion of your total super balance that is above the $3 million and $10 million thresholds will instead be calculated using the greater of:
- your total super balance at the end of the income year; and
- your total super balance at the end of the previous income year.
This means that withdrawing super to drop below the $3 million or $10 million thresholds to avoid Division 296 tax would not be effective if your total super balance at the start of the year was above these thresholds.
This may unfairly impact members who experience a decline in their total super balance due to ordinary market movements during a year. We are hopeful this issue can be addressed during consultation.
There will be a transitional arrangement during the 2026-27 income year to allow individuals to withdraw amounts from super so that only their total super balance at the end of the year is used to calculate the proportion of their total super balance that is above the $3 million and $10 million thresholds.
Application of Division 296 after death
The “integrity measure” discussed above will also mean that, unlike in the initial proposal, there will still be a Division 296 tax liability in the year of death and possibly in future years depending on the timing of the death benefit. This is because the calculation will use their total super balance at the start of the income year to determine their tax liability. There will be transitional rules such that Division 296 will not apply for the 2026-2027 income year for individuals who die prior to 30 June 2027.
Under the initial proposal, there would be no Division 296 tax liability in the year of death.
Understanding the thresholds
There will be two thresholds under Division 296:
- a tax rate of 15% will apply to superannuation earnings corresponding to the proportion of your total super balance exceeding $3 million; and
- an additional tax rate of 10% will apply to superannuation earnings corresponding to the proportion of your total super balance exceeding $10 million.
When combined with the first threshold, the second threshold effectively means a tax rate of 25% will apply to the proportion of your total super balance exceeding $10 million.
Both thresholds will be indexed to the Consumer Price Index, subject to increments of $150,000 for the $3 million threshold and $500,000 for the $10 million threshold.
Earnings for Division 296 purposes
Division 296 tax will be levied against superannuation earnings that have been attributed to you by each of your super funds.
As announced previously, fund earnings will largely rely on ordinary concepts of taxable income – with some adjustments. In particular, earnings will include the gross up for franking credits and realised net capital gains (after any discount) and exclude contributions. Exempt pension income will also be added back and be subject to Division 296 tax.
Superannuation funds would then attribute a portion of fund earnings to each member in the manner prescribed by the Regulations.
It is expected that self-managed funds will be required to obtain an actuarial certificate for the purposes of attributing fund earnings for Division 296 purposes. This will effectively attribute earnings to each member based on the weighted average of their interest across an income year. We expect this will work in a similar way to existing exempt current pension income calculations.
Large super funds (e.g. retail and industry funds) will have a different method to attribute fund earnings – but it will broadly be on a “fair and reasonable” basis.
Unrealised gains accrued prior to 1 July 2026
The draft legislation confirms that for Division 296 purposes, a self-managed fund can elect to adjust the cost base of assets to their market value as at 30 June 2026. If an election is made, the new tax will not apply to unrealised gains that accrued prior to 1 July 2026.
This may be particularly beneficial if your self-managed fund holds assets with significant unrealised gains.
It is important to note that this adjustment is for Division 296 purposes only. It will not adjust the cost base of any asset in a super fund for ordinary capital gains tax purposes.
Further, the election to adjust cost bases for Division 296 purposes will apply to all assets held by the self-managed fund – assets in a loss position at 30 June 2026 could not be excluded.
Although an election does not need to be made until the due date for the 2026-27 income tax return, you will need to obtain appropriate evidence of market values (e.g. property valuations) as at 30 June 2026.
Self-managed funds will be able to make an election even if they have no members currently subject to the new tax but may be subject to the tax in future years.
Funds with indirectly held assets
If your self-managed fund holds assets through structures including unit trusts, it will be important to understand how the cost base adjustment will apply to you. In particular, it is the cost base of the units held by your fund that will be adjusted for Division 296 purposes.
The cost base of underlying assets within the unit trust will not be adjusted.
This may mean that future realised capital gains within the unit trust could be distributed to the self-managed fund unitholder in full without the benefit of this cost base adjustment.
If your self-managed fund holds assets indirectly, including in unit trusts, we can discuss options that may be available to you.
Division 296 example
The explanatory memorandum accompanying the draft legislation provided the following example to help illustrate the impact of the new proposal:
Kelly – Total super balance greater than $10 million
- Kelly has a total super balance (TSB) of $12 million at the end of 2026-27, and total superannuation earnings attributed to her of $500,000.
- As Kelly’s TSB is greater than the very large superannuation balance threshold of $10 million, and her total superannuation earnings are greater than nil, Kelly will have taxable superannuation earnings – including a very large superannuation balance earnings component – for Division 296 purposes.
- The proportion of Kelly’s TSB above the large superannuation balance threshold of $3 million is 75 per cent (($12 million – $3 million) / $12 million). The proportion of Kelly’s TSB above the very large superannuation balance threshold of $10 million is 16.67 per cent (($12 million – $10 million) / $12 million).
- Kelly’s Division 296 tax comprises two parts.
- For the proportion above the $3 million threshold, she has taxable superannuation earnings calculated as $375,000 (75 per cent of $500,000).
- For the proportion above $10 million, she also has a very large superannuation balance earnings component calculated as $83,350 (16.67 per cent of $500,000).
- The amount of $375,000 relating to the proportion above $3 million will be taxed at 15 per cent, resulting in tax of $56,250 (15 per cent of $375,000). The amount of $83,350 relating to the proportion above $10 million will be taxed at an additional 10 per cent, resulting in tax of $8,335 (10 per cent of 83,350).
- Kelly’s total Division 296 tax liability for the 2026–27 income year will be $64,585 ($56,250 + $8,335).
What you should do next
We believe taxpayers should wait until the legislation is formally enacted before taking any action. Although the start date is approaching – there will be transitional rules that provide some flexibility to take action during the first year of the new tax.
Nonetheless, we recommend that you start to consider whether Division 296 is likely to apply to you and the possible impacts it may have on your broader tax and estate planning.
We anticipate the better approach will vary considerably between individuals.
If you would like to discuss your situation further, please reach out to your Pitcher Partners representative.
