Division 296 refers to a new legislative measure that introduces an additional 15% tax on certain earnings derived from superannuation balances exceeding $3 million. It’s part of the Better Targeted Superannuation Concessions and Other Measures Bill, originally passed by the House of Representatives in October 2024.
Although the bill stalled in the Senate ahead of the recent federal election, the re-elected Labor Government has reaffirmed its intention to legislate this reform, likely in its current form, without amendments. This means that unless unexpected changes occur, Division 296 will take effect on 1 July 2025.
This tax doesn’t replace existing super tax rates (such as 15% in the accumulation phase or 0% in pension phase). Instead, it layers an additional charge based on the growth of your superannuation assets, but only to the extent that your total superannuation balance (TSB) exceeds $3 million.
The policy objective, according to the Treasury, is to reduce tax concessions for high-balance individuals, ensuring superannuation primarily serves its purpose as a retirement savings system, not a long-term tax shelter for generational wealth.
Who Will Be Affected by Division 296?
Division 296 is targeted, not at everyone, but at individuals whose total superannuation balance exceeds $3 million on 30 June of a given financial year. It’s crucial to understand that this balance is aggregated across all your super accounts, not evaluated per fund.
What Is Included in the Total Superannuation Balance (TSB)?
According to the Income Tax Assessment Act, your TSB includes:
- Accumulation accounts – the part of super still accruing earnings
- Retirement phase pension accounts – already tax-exempt earnings, still count toward TSB
- All self-managed and retail/industry fund balances – consolidated across providers
- Excluded: Outstanding limited recourse borrowing arrangements (LRBAs) made after 1 July 2018
- Less: Structured settlement or personal injury contributions
In effect, Division 296 applies to high-net-worth individuals, self-managed super fund (SMSF) trustees, business owners with property-heavy funds, and anyone who has built a large super balance through strategic accumulation over time.
How Is the Division 296 Tax Calculated?
There’s a common misconception that this is a flat 15% tax on everything over $3 million. It isn’t. Instead, the tax applies only to a portion of your earnings, specifically the proportion related to the part of your superannuation balance above the $3M threshold.
The ATO uses a three-step methodology to calculate this:
1. Calculate Superannuation Earnings
This is determined by a simple formula:
Closing TSB − Opening TSB + Withdrawals − Net Contributions
This figure captures the net growth in your superannuation for the financial year, accounting for market movements, income, and external changes.
2. Determine the Proportion of TSB Over $3M
Next, the ATO calculates the percentage of your super that exceeds the $3 million cap:
(TSB − $3,000,000) ÷ TSB
This step ensures that only the relevant share of your earnings is taxed, not the entire amount.
3. Apply the 15% Division 296 Tax Rate
The tax applies only to the proportion of your earnings attributable to the excess balance.
Example Calculation:
Let’s say your super balance grew as follows in 2026:
- Opening TSB: $4,800,000
- Closing TSB: $5,200,000
- Withdrawals: $100,000
- Net Contributions: $30,000
Earnings = $5,200,000 − $4,800,000 + $100,000 − $30,000 = $470,000
Proportion over $3M = ($5.2M − $3M) ÷ $5.2M = 42.3%
Taxable Super Earnings = $470,000 × 42.3% = $198,857
Division 296 Tax Payable = $198,857 × 15% = $29,829
In this case, although the total balance exceeds $5 million, the actual tax payable under Division 296 is under $30,000, reflecting a proportional and earnings-based approach, not a flat penalty.
Does Division 296 Tax Unrealised Gains?
Yes, and that’s where much of the industry concern arises.
Unlike Capital Gains Tax (CGT), which is triggered only upon the realisation (sale) of an asset, Division 296 taxes unrealised gains, the paper increase in value of superannuation holdings year-on-year. This means you could owe tax even if you haven’t sold or received income from your investments.
This design has two serious implications:
1. Valuation Volatility
In years when assets like property or equities increase in value, the resulting tax is based on these market-driven valuations, not realised income. In years of decline, the earnings may be negative, but they can only be used to offset future positive earnings.
2. Liquidity Pressure
SMSFs or high-balance funds with illiquid assets (e.g., direct property, private equity) may find themselves cash-poor but asset-rich. The fund may not generate sufficient liquid income to pay the Division 296 tax, forcing trustees to either:
- Sell assets (possibly at inopportune times), or
- Use personal funds to cover the liability
Important Clarification:
Division 296 does not change the CGT cost base of assets. It also does not create an additional tax on realised gains, only on annual value growth. The ATO will not require a CGT event to trigger the tax; they’ll assess value movements based on reported super balances.
Can Division 296 Tax Be Avoided or Minimized?
While it can’t be avoided entirely if your TSB exceeds $3 million, there are several legitimate planning strategies that may help minimise exposure:
1. Rebalancing Within Superannuation
Assess whether high-growth or high-volatility assets can be shifted to non-super structures where capital gains are only taxed upon sale, rather than annually.
2. Asset Allocation for Liquidity
Hold a reasonable proportion of liquid assets (e.g., ETFs, term deposits) within the fund to prepare for future tax payments, especially if your fund includes illiquid holdings like property.
3. Managing Contributions and Withdrawals
Smart timing of concessional and non-concessional contributions, as well as pension withdrawals, can help control earnings flows and tax timing.
4. Using Defined Benefit Structures
While rare, individuals with defined benefit accumulation accounts may be able to defer Division 296 tax payments until they enter pension phase, with interest accruing.
Ultimately, the goal is not to dismantle your super strategy, but to adapt to a changing compliance environment with clear, forward-looking financial decisions.
What Happens If You Have Negative Earnings?
Division 296 does include a mechanism for recognising investment losses. If the formula results in negative superannuation earnings in a given financial year (e.g., due to market downturns), you won’t be taxed for that period under Division 296.
Instead, the negative earnings are treated as a carry-forward loss, which can be used to offset future positive Division 296 earnings. This helps to smooth out the tax impact over time and reduces the likelihood of being penalised for temporary valuation drops.
However, it’s important to note:
- Carry-forward losses are not refundable. They simply reduce future taxable earnings.
- They do not offset the standard 15% tax applied in the accumulation phase, Division 296 operates independently.
- If an individual’s TSB drops below $3 million in a future year, no Division 296 tax will be assessed, and any unused losses can remain available if the balance exceeds $3 million again.
This feature introduces a level of fairness to an otherwise rigid regime, but it also underscores the need for year-by-year tracking of earnings, balances, and tax liabilities.
How Will the ATO Enforce Division 296?
One of the biggest advantages for the ATO, and a potential challenge for individual, is that Division 296 is not self-assessed. It will be calculated automatically by the ATO using information already reported by superannuation funds.
Here’s how administration will work:
Annual Assessment by the ATO
- The ATO will compare your superannuation balance at 30 June each year with the prior year.
- It will use fund-reported data to calculate earnings, assess thresholds, and determine tax liability.
- You’ll receive a Division 296 assessment, separate from your regular income tax assessment.
Payment Deadline
- Payment will be due 84 days from the date of the ATO’s assessment notice.
- Taxpayers can choose to:
- Pay using personal funds, or
- Request a release authority to access funds from their super (except from defined benefit funds).
Liquidity Requirements
This administrative model places a new liquidity responsibility on fund trustees, especially SMSFs. You must ensure that your fund has adequate cash flow or easy-to-access investments to meet any tax obligations without needing to prematurely liquidate illiquid assets.
What Are the Industry Concerns About Division 296?
Since its announcement, Division 296 has attracted significant criticism from industry associations, superannuation professionals, and financial advisers.
Key Concerns:
1. Taxing Unrealised Gains
This is the most controversial element. Unlike traditional tax systems that rely on realised events (e.g., asset sales), Division 296 imposes tax on paper gains, which may never materialise or may later reverse.
This raises issues of timing mismatch, where individuals are forced to pay tax on theoretical profits they can’t yet access.
2. No Indexation of the $3M Threshold
The $3 million cap is fixed, not indexed. Over time, inflation and superannuation growth mean more people will cross the threshold even without actively contributing large amounts.
This could pull a larger segment of middle-market wealth holders into the tax net in the next 5–10 years, particularly those with long-term investment strategies or defined contribution pensions.
3. Impact on Investment Behaviour
Division 296 may lead to distortions in investment strategy, such as:
- Avoiding high-growth or illiquid assets
- Reducing long-term exposure to real estate or private markets
- Prioritising liquidity over return
This could undermine the original purpose of superannuation: growing retirement wealth through long-term compounding.
4. Increased Complexity for SMSFs
Self-managed superannuation funds will bear the administrative burden of maintaining up-to-date valuations, tracking growth, and managing potential liquidity risks, adding to compliance overheads for trustees.
Should You Change Your Super Strategy?
For those with high super balances, the introduction of Division 296 is a prompt to review your superannuation plan, not abandon it.
Superannuation Remains Tax-Effective
Despite this additional tax layer:
- Earnings in accumulation phase remain taxed at 15%
- Earnings in retirement phase remain tax-free
- There is no limit on how much you can hold in super, it’s just that excess balances now attract a second layer of tax
In most cases, superannuation is still the most efficient long-term savings vehicle, especially compared to individual or trust structures where tax rates can be far higher.
Key Strategic Adjustments
- Segregate liquid and illiquid assets for potential release scenarios
- Model out future Division 296 liabilities based on projected balance growth
- Align business exit strategies (e.g., CGT event from a business sale) with TSB monitoring to avoid spikes in super balance that trigger excessive Division 296 exposure
- Document pension phase timing carefully to ensure compliance with balance cap and reporting requirements
Next Steps if Your Super Is Over (or Nearing) $3 Million
This is not a set-and-forget environment. Every individual approaching the $3 million mark, especially those in the $2.5M–$4M range, should take proactive action now.
Annual Financial Review Checklist:
- Review all super accounts (retail, SMSF, industry) and consolidate where appropriate
- Check asset valuations and expected growth trajectory
- Understand the source of growth (capital vs. income)
- Monitor liquidity inside the fund
- Stress-test fund cash flow against potential Division 296 assessments
- Discuss non-super options for future investments if TSB is well above threshold
This should form part of your year-end tax planning and retirement modelling process.
How Blackwattle Tax Can Help You Prepare
The amount of the FTL penalty depends on the size of the entity and the duration since the lodgement due date:
- Small Entities: One penalty unit for each 28-day period (or part thereof) that the return or statement is overdue, up to a maximum of five penalty units. As of 1 July 2023, one penalty unit is $313.
- Medium Entities: The penalty unit is multiplied by 2.
- Large Entities: The penalty unit is multiplied by 5.
- Significant Global Entities: The base penalty amount is multiplied by 500
At Blackwattle Tax, we understand that the intersection of superannuation and business tax strategy is no longer simple. Division 296 has added another layer of complexity for mid-market businesses and high-net-worth individuals.
Our team provides:
- Tailored modelling of Division 296 exposure
- SMSF structuring to manage liquidity and reporting
- Pension phase optimisation
- Cross-structure planning to align personal and business tax outcomes
- Ongoing tracking of legislative developments
We don’t just provide advice, we partner with you to build a smarter, adaptive tax strategy that reflects the evolving landscape.
Book Your Free 30-Minute Strategy Session
Speak directly with our specialist team to gain clarity, reduce uncertainty, and make confident tax decisions.
Schedule your consultation now, let’s make your super work smarter, not harder.
Final Word
Division 296 marks a significant shift in superannuation policy. While it’s targeted at high balances, its reach, and impact, will expand over time as more individuals approach the threshold through natural investment growth.
Planning, not panic, is the best response. If you believe you may be affected, now is the time to review your super strategy.
Schedule a FREE 30-minute consultation today to discover how we can help you make strategic decisions and streamline your business operations.
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Disclaimer: We endeavour to make sure the information provided in this guidance is up to date and accurate. Please note, that the information is only intended to be a guide, with a general overview of information. This guidance is not a comprehensive document and should not be interpreted as legal advice or tax advice. The information is general in nature. You should seek the assistance of a professional opinion for any legal and tax issues related to your personal circumstances.
