Unpacking the proposed Division 296 tax

The Federal Government has announced a major shakeup to the superannuation landscape with the proposed Division 296 tax. While this tax is not yet law, if passed, it is expected to apply from 1 July 2025 (i.e. for the 2026 financial year).

Most superannuation funds are taxed at a concessional rate of 15% (or 0% for those in retirement phase). Under the proposal, if an individual’s total super balance is above $3 million at the end of the previous financial year, they will be subject to a 15% tax on the proportion of earnings relating to the superannuation balance above the $3 million threshold.

Superannuation earnings will be calculated by subtracting an individual’s opening total super balance from the closing total super balance, after adjusting for contributions and withdrawals made during the year. This means that tax is potentially assessed on both realised and unrealised gains made during the year.

Here is a practical example below.

An individual's total super balance as at 30 June 2025 is $3.5 million. At the end of the 2026 financial year (30 June 2026) the individuals total super balance grows to $4 million. The individual did not make any contributions or withdrawals during the year. The calculation of the Division 296 tax would be as follows:

Earnings for the year: $4m – $3.5m = $500,000

Proportion of earnings relating to the balance over $3m: ($4m - $3m) / $4m= 25%

Earnings subject to Division 296 tax: 25% x $500,000 = $125,000

Division 296 tax payable: $125,000 x 15% = $18,750

The Division 296 tax can be paid from personal funds or can be paid from your superannuation fund upon request.

If your total super balance is close to or over the $3 million and you have any concerns, speak to your financial advisor or accountant. There may be potential strategies to deal with or mitigate the potential Division 296 tax.

Especially for those who manage their own superannuation through a Self-Managed Superannuation Fund (SMSF); there are a number of considerations. Such as:

• Ensuring assets held in the fund are valued at market value at years end and appropriate evidence is obtained (e.g. property market appraisals)

• Consider the liquidity of your SMSF or own personal funds to pay for the division 296 tax should it arise

Consider re-contribution strategies to move super from one spouse to another if there is a large disparity between member.