Do you have an SMSF with a balance close to or exceeding $3 million? It's important to understand how the Division 296 tax could affect you, especially since it includes unrealised gains or losses. The 15% Division 296 tax applies to changes in asset valuations that haven’t yet been realised, which may create cash flow challenges. This means you might need to pay tax on assets that haven’t generated actual income.

The recent changes to Division 296 tax will significantly impact individuals with superannuation balances exceeding $3 million. Effective from 1 July 2025, the new tax imposes an additional 15% on superannuation earnings that relate to the portion of a Total Superannuation Balance (TSB) over $3 million, bringing the effective tax rate on these earnings to 30%.

If your superannuation balance exceeds $3 million, it's crucial you understand how these changes could affect your financial plans. The Division 296 tax will apply to the growth in your TSB above the $3 million threshold, potentially altering the tax efficiency of your retirement savings. Careful financial modelling and professional advice may be necessary to navigate these changes effectively.

If you're concerned about the impact of the Division 296 tax on your superannuation balance, consider scheduling a complimentary consultation with us today.

Who will be affected by the Div 296 tax?

On 28 February 2023, the Government announced a significant change to the taxation of superannuation earnings for individuals with a Total Superannuation Balance (TSB) exceeding $3 million, effective from 1 July 2025. Under this proposed legislation, certain superannuation earnings associated with TSBs over $3 million will face an additional 15% tax, in accordance with Division 296 of the Income Tax Assessment Act. This means that these earnings will be taxed at an effective rate of 30%.

In contrast, superannuation earnings related to TSBs up to $3 million will continue to benefit from the current tax concessions, such as the general 15% fund rate or even a tax-free status when derived from assets supporting retirement phase pensions. The draft legislation is aimed at better targeting superannuation concessions to address high super balances. The changes could have a significant impact on those with substantial superannuation interests, making it essential to conduct detailed financial modelling and seek professional advice to understand the implications.

Given the complexity and potential impact of the proposed Division 296 tax, individuals affected by these changes should avoid acting hastily and instead focus on making objective, informed decisions based on their specific circumstances.

What is the effective date for the new tax?

Starting from 1 July 2025, individuals with a Total Superannuation Balance (TSB) exceeding $3 million at the end of the income year (e.g., on 30 June 2026, for the 2026 income year) may be subject to Division 296 tax. This tax imposes an additional 15% on superannuation earnings that relate to the portion of the TSB above $3 million.

However, certain individuals are exempt from the Division 296 tax, even if their TSB exceeds $3 million. These exemptions include child recipients of superannuation income streams, individuals receiving structured settlement contributions, and those who pass away before the end of the income year.

How is the Div296 tax calculated?

The concept of an individual's TSB plays a crucial role in determining liability for the Division 296 tax. Specifically, the TSB is used to assess whether an individual may be subject to the Division 296 tax (e.g., if their TSB exceeds $3 million at the end of the income year) and the portion of their superannuation earnings that will be subject to the additional 15% tax under Division 296.

Traditionally, the TSB, as defined in section 307-230 of the Income Tax Assessment Act, has been used to determine eligibility for various superannuation-related concessions.

These include:

Non-concessional contributions cap

Generally, an individual can only access this cap if their TSB on 30 June of the preceding year is less than the general transfer balance cap for the current year.

Catch-up concession for concessional contributions

This concession allows eligible individuals to make additional concessional contributions using any unused cap amounts carried forward from the previous five income years. However, access to this concession is limited to those with a TSB of less than $500,000 on 30 June of the preceding income year.

For Division 296 purposes, the existing TSB calculation will generally apply, though with some amendments proposed by the Bill.

Under these amendments, an individual's TSB for Division 296 purposes will be calculated as follows:

1. TSB value at that time: This includes the total value of all superannuation interests, such as accumulation interests and tax-free retirement phase pension interests, excluding interests in foreign super funds. The TSB value is essentially the total amount of super benefits that would be payable if the individual cashed out their super entitlements.
2. Plus: Any rollover superannuation benefits paid at or before that time but received by the super fund after that time.
3. Less: Any structured settlement contributions.

These adjustments ensure that the TSB calculation accurately reflects the value of an individual's superannuation interests for the purposes of the Division 296 tax.

How will you pay the Div296 tax?

Starting from 1 July 2025, individuals with a Total Superannuation Balance (TSB) exceeding $3 million at the end of the income year (e.g., on 30 June of the relevant income year) may be subject to Division 296 tax. Unlike regular tax calculations based on taxable income, Division 296 tax is determined by the growth in the individual's TSB above $3 million over the income year.

The calculation of an individual's Division 296 tax liability for an income year, beginning from the 2026 income year, involves a three-step process:

Step 1: Calculate the 'superannuation earnings' amount

The first step in determining the 15% Division 296 tax liability is to calculate the individual's superannuation earnings for the income year. This calculation follows a specific formula outlined in section 296-40 of the Income Tax Assessment Act. When calculating the TSB or adjusted TSB for Division 296 purposes, any Limited Recourse Borrowing Arrangement (LRBA) amounts are excluded. A Division 296 tax liability only arises if the calculated superannuation earnings amount is positive, meaning there must be at least $1 of earnings.

A. Applying the deemed $3 million TSB adjustment

When calculating superannuation earnings, if an individual's adjusted year-end TSB or their TSB just before the start of the income year is less than $3 million, it is deemed to be $3 million. This adjustment ensures that only the earnings above $3 million are subject to Division 296 tax. For example, if an individual's TSB on 30 June 2025 is $2.8 million and their adjusted TSB on 30 June 2026 is $3.2 million, the TSB for 30 June 2025 is increased to $3 million. Consequently, the individual's superannuation earnings for the 2026 income year would be $200,000 ($3.2 million - $3 million).

B. Calculating an individual's adjusted TSB for the income year

To calculate an individual's adjusted TSB at the end of the income year, certain withdrawals from superannuation (which would otherwise reduce the TSB) are added back, and certain contributions to superannuation (which would otherwise increase the TSB) are deducted. These adjustments ensure that the superannuation earnings are not understated or overstated due to withdrawals or contributions.

1. Withdrawals total: This includes certain amounts paid from the individual's superannuation interests during the year, such as lump sum benefits, pension payments, spouse contributions-splitting benefits, family law superannuation payments, and death benefits. Certain amounts, such as reductions due to fraud or dishonesty under specific conditions, are excluded. If a withdrawal falls into more than one category, it is only counted once to avoid double counting.
2. Contributions total: This includes amounts paid into the individual's superannuation interests during the year, such as the after-tax amount of concessional contributions, non-concessional contributions, spouse contributions-splitting benefits, family law superannuation payments, death benefit pensions, and insurance proceeds. Similar to withdrawals, if a contribution fits into more than one category, it is only counted once.

These calculations are critical in determining the correct Division 296 tax liability and ensuring that only appropriate earnings are taxed under this division.

Step 2: Calculate the 'taxable superannuation earnings'

If an individual has a Total Superannuation Balance (TSB) exceeding $3 million at the end of the income year (starting from the 2026 income year) and positive superannuation earnings (resulting in a Division 296 tax liability), the next step is to calculate the portion of their super earnings attributable to the excess TSB above $3 million. This is done using the following formula (as outlined in section 296-35 of the Income Tax Assessment Act):

The result is rounded to two decimal places, with rounding up if the third decimal place is five or more.

This percentage is then applied to the individual's super earnings amount (calculated in Step 1) to determine their 'taxable superannuation earnings' for the year.

Step 3: Apply the 15% Division 296 tax to the taxable superannuation earnings from Step 2

In the final step, the Division 296 tax rate of 15% is applied to the taxable superannuation earnings calculated in Step 2. The formula for calculating the Division 296 tax liability is:

Is the Div296 tax finalised law?

It’s important to note that Division 296 tax is not yet law and may undergo changes before it is finalised. Several organisations are advocating for adjustments, such as:

• excluding unrealised gains from taxable superannuation earnings
• implementing a loss carry-back or refund system if unrealised gains are taxed, instead of the proposed carry-forward loss approach, which could lead to tax being paid on gains that may later result in a loss.
• indexing the $3 million threshold to account for inflation.

Currently, Division 296 remains a proposed law within the Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023 (Cth). To stay updated on the progress of this Bill through Parliament, you can visit: Parliamentary Business - Bills and Legislation.

Key considerations for managing your superannuation balance

A member’s total superannuation balance includes unrealised gains or losses, which means the 15% Division 296 tax will also be applied to changes in asset valuations that haven’t yet been realised. This could create cash flow challenges, as tax would need to be paid on assets that haven't generated actual income.

If a member experiences negative earnings in a financial year, these losses will be carried forward to offset future earnings. However, the proposed legislation does not provide a tax refund when a loss is incurred on the total superannuation balance. If a member’s balance falls below the $3 million threshold, they may not benefit from applying these losses.

Additionally, there is currently no mechanism in place to adjust or index the $3 million threshold.

Why might you wait until 30 June 2026 to act?

Some believe that restructuring should occur before 1 July 2025, when the new Division 296 tax is set to take effect. However, this isn't necessarily the correct approach. The more relevant date is potentially 30 June 2026.

The Division 296 tax is only payable if, among other factors, your Total Superannuation Balance (TSB) at the end of the year is greater than the large superannuation balance threshold, i.e., $3 million. Therefore, if someone had, for example, $4 million in a Self-Managed Super Fund (SMSF) during most of the 2026 financial year, but withdrew $1 million on 15 June 2026, they would likely avoid Division 296 tax.

Some disagree with this interpretation, arguing that withdrawals are added back for the purpose of calculating superannuation earnings under section 296-40(2) of the ITAA. However, this provision does not apply to section 296-35(1)(a). Consequently, a person with a TSB of no more than $3 million at the end of the relevant year would not be liable for Division 296 tax.

Advising clients to make withdrawals before 1 July 2025 to reduce Division 296 tax liability could lead to missed opportunities. Nevertheless, there may still be valid reasons to consider withdrawals before 1 July 2025 or 30 June 2026, such as reducing the impact of Division 296 while keeping the TSB above the $3 million threshold.