The Government has now legislated the controversial new superannuation tax (Division 296).

Starting 1 July 2026, the reforms marks one of the most significant changes to the taxation treatment of superannuation earnings.

What is the new Division 296 tax and how does it work?

Division 296 will impose a new tax rate to earnings on superannuation balances above $3 million, with a (new) higher rate applying to balances above $10 million.

The relevant thresholds and effective tax rates on superannuation earnings are summarised below:

*Lower tax rates apply to discounted capital gains (10%) and a tax exemption applies to earnings attributable to pension balances (this is not applicable to Division 296).

The higher rates above only apply to the proportion of earnings attributable to the individual’s balance which exceeds the relevant threshold.

In a welcome change to the final legislation passed, the high-balance thresholds will be indexed in line with CPI (in increments of $150,000 and $500,000 for the $3 million and $10 million thresholds respectively).

As an integrity measure, the higher of an individual’s total superannuation balances at the start or the end of relevant financial year will be used to calculate the proportion of their earnings which exceed the above thresholds.

Special rules and calculation methodologies apply to defined benefit accounts and legacy pensions. These are not discussed in this article.

Example

If an individual had a superannuation balance of $8 million across all their accounts at the end of the year (which was higher than $7.5 million at the start of the year) and their superannuation earnings for Division 296 purposes was $100,000 for the year, their Division 296 tax liability would be calculated as follows:

Who pays the Division 296 tax?

Although the new Division 296 tax is calculated with reference to earnings on an individual’s superannuation assets, the tax is levied on the member personally under the law.

However, members can elect for the tax to be paid from their superannuation account balance. This will be done by completing an election form with the ATO, who will then issue a release authority for the funds to be released from the individual’s preferred account (similar to the election for Division 293 tax on concessional contributions).

Who is responsible for calculating the Division 296 earnings?

The Australian Taxation Office (ATO) will determine which individuals are in-scope for Division 296 tax, using account balances reported by funds at the end of each financial year.

For self-managed funds, trustees (or their advisors) will be required to calculate the fund’s earnings for Division 296 purposes, attribute this to in-scope members and report this information to the ATO:

1. The earnings amounts will be based on the existing tax concepts. An advantage of the new methodology is that the highly controversial tax on “unrealised gains” has been removed.
2. The allocation between members must be done on a fair and reasonable basis, typically based on average account balances throughout the year. An actuarial certificate will be required to verify the apportionment between members (unless the fund only has one member), introducing additional costs for most self-managed funds.
3. This calculation may be complicated further by transitional relief for capital gains (discussed below) and other adjustments from the fund’s tax return (including the removal of contributions received and non-arm’s length income, and the addition of pension exemption amounts), introducing added complexity for advisors.

The ATO is then responsible for assessing and collecting the tax from individuals. The first assessments for the year ending 30 June 2027 will start being issued after this date.

Does Division 296 tax apply to deceased members?

Yes – members who die during a financial year will still be subject to the Division 296 tax and the tax will become a debt of the deceased estate. This was another contentious point with the introduction of this new tax.

An individual’s total superannuation balance is deemed to be nil at the end of the financial year of their death. However, this does not prevent their estate from being liable for Division 296 tax if their balance at the start of the year exceeds $3 million.

We expect that this will have an impact on estate planning and could cause potential delays in deceased estate administration. As earnings continue to accrue until all death benefits are paid out, executors will need to wait for the ATO to issue its final Division 296 assessment before the estate can be finalised.

There is a transitional rule for the first year (ending 30 June 2027), where only the ending balance is used for the purposes of determining if an individual is liable for Division 296 tax. This means those who die before this date will not receive an assessment (regardless of their balance at the time of their death).

What transitional relief is available for gains accrued prior to the new rules?

There is transitional relief being provided for capital gains accrued prior to the start date of 1 July 2026.

This will take the form of an election, where self-managed funds can “reset” the cost bases of their assets for Division 296 purposes to the market value of the asset on 30 June 2026.

Although the relief is welcome, the election if made, operates on a “one-in, all-in” to all assets held by the fund. Therefore, assets with unrealised losses will unfortunately have their cost bases reduced to the lower market value amount, increasing gains on these assets for Division 296 purposes when disposed of in the future. Net capital losses calculated under Division 296 cannot be carried forward to reduce “earnings” in future years.

The choice to utilise the capital gains relief is not required to be made until the fund’s tax return for the 2027 financial year is lodged, giving trustees the benefit of hindsight to make the choice. However, trustees may wish to consider the likely impact and review investment positions prior to 30 June 2026, particularly for assets with unrealised losses.

What should I do before the start date of 1 July 2026?

Preparing early and understanding the impact is critical. We recommend that members with large balances (or who expect to grow their balances above the thresholds in the near future) prepare now and understand their likely position under this new tax.

It is important to obtain accurate valuations on 30 June 2026, particularly high-value real property and unlisted assets, as they are likely to be scrutinised by the ATO in the wake of Division 296.

A review of SMSF assets with unrealised losses may help in deciding whether to sell prior to 30 June 2026 rather than having the cost bases reduced in the “reset” election.

Individuals should also review their wills and estate planning, to consider the impact of the new tax on who receives superannuation or other assets in the event of their death.

Self-managed funds with a large portion of illiquid assets may need to review the investment portfolios to ensure cash is available to pay the new tax (where cash is not available outside of superannuation to pay the tax).

While some members may be tempted to withdraw their assets from superannuation prior to 30 June 2027 to avoid this new tax, we recommend undertaking a holistic and considered view, evaluating all options. Additionally, restrictions apply to the cashing of benefits for those who are not retired and are below age 65. Obtaining appropriate financial and tax advice is key to achieving the best outcome.

Contact Pilot

If you would like our assistance in advising on Division 296 tax and what it means for you, please contact Murray Howlett or your Pilot Advisor on (07) 3023 1300.