Division 296

Division 296 tax depends on how much someone has in super - so this is a critical figure. The technical term for it is “total superannuation balance” (or TSB).

For most of us, it’s just the amount that shows on our superannuation member statement each year (or adding up several member statements for people who have super in multiple different accounts or funds). Sometimes it can be different – more on that in a moment.

TSB is actually an amount used for lots of things. For example, people with very high TSBs (more than $1.9m at 30 June 2024) can’t make any non-concessional contributions in 2024/25 without facing extra taxes for going over the cap on these contributions. And there are other special tax rules are only available to people with TSBs below particular thresholds.

As part of the Division 296 changes, the Government also plans to make some changes to TSB more broadly – see our blog "Division 296 – more than just a new tax" below for more information. Those changes will flow through to all the other things like contributions as well.

However, there is one specific modification to TSB when it comes to Division 296 tax. Certain members who have super in an SMSF that has borrowed using a “limited recourse borrowing arrangement” (LRBA) since 1 July 2018 have some or all of the outstanding loan amount added to their normal super balance to work out their TSB. This “add back” will be excluded from the TSB used for Division 296 tax purposes.

TSB at the end of the financial year - $3m
TSB at the end of financial year

The formula is essentially trying to work out the proportion of the member’s total balance which exceeds $3m. The tax will then apply to only that proportion of the member’s superannuation earnings (rather than all of them).

For example, Brad’s balance in superannuation (his TBS) at 30 June 2026 is $5.5m.  The proportion of Brad’s earnings in 2025/26 which is subject to the Division 296 tax is calculated as:

($5.5m - $3m) ÷ $5.5m = 45.45% (rounded to 2 decimal places)

However, Michael’s TSB at 30 June 2026 is $3.1m.  The proportion of Michael’s earnings in 2025/26 which is subject to the Division 296 tax is calculated as:

($3.1m - $3m) ÷ $3.1m = 3.23% (rounded to 2 decimal places)

Importantly, when it comes to calculating this proportion, it doesn’t matter if the member’s TSB was less than $3m at the start of the year. It is only the end of year figure that impacts how much of their fund earnings are subject to the Division 296 tax.

“Earnings” are not calculated in the same way as the fund’s taxable investment income. Broadly speaking, “earnings” in a super fund when it comes to Division 296 tax is anything (apart from contributions) that makes a member’s super balance go up, less anything (apart from withdrawals) that makes their balance go down.

For example, Brad’s super increased from $5m to $5.5m during the year. He didn’t make any new contributions and he didn’t take any money out of his fund (such as pension payments). The growth in Brad’s balance all came from growth in the fund’s assets and income such as interest, rent and dividends.

His “earnings” for Division 296 tax would be $5.5m less $5m, ie $0.5m.

Importantly, this is all of the growth in Brad’s total super balance (TSB) – even growth from unrealised gains in his fund’s assets.

But what if instead, some of the growth in Brad’s TSB had come from contributions? Or Brad had taken payments from his pension or accumulation account? There’s a formula to adjust for that.

For example, if Brad made a $300,000 downsizer contribution and took $100,000 in pension payments during 2025/26, his earnings in 2025/26 would be: $5.5m + $100k - $300k - $5m = $300k

In other words, the growth in his balance ($5.5m - $5m) adding back his pension payments of $100k (because clearly his balance actually grew by even more than $500,000 if there’s still $5.5m left after taking these payments) and then reducing by his contributions (because some of the growth in the balance came from new money he put in – it wasn’t “earnings”).

Importantly though, this is still all the growth in his super that has come from his investments.

And what would Brad’s Division 296 liability be?

15% x the proportion (45.45%) x earnings ($300k) = $20,500 (approx.)

I’ve heard that “earnings” includes unrealised capital gains.  Is that right?

Yes.  “Earnings” for the purpose of the Division 296 tax doesn’t just include the income the superannuation fund would normally pay tax on – things like interest, rent, dividends or capital gains on assets it’s actually sold.

“Earnings” for Division 296 tax includes everything that causes the member’s account balance to go up – and that will include increases in the value of the assets their fund holds even when it hasn’t sold anything (ie unrealised capital gains).

Capital gains are part of the “earnings”, do they get the normal 1/3^rd discount that applies to capital gains when they are taxed in a super fund?

No. Earnings for Division 296 is pretty much any growth in a member’s super account from their fund’s investments. So it includes all of the growth in assets (capital gains) with no discounting.

When assets are eventually sold, is there a capital gains tax credit for the Division 296 tax that’s already been paid?

No. Fund tax is entirely separate to Division 296 tax and will continue with no change. When the assets are sold by the super fund, the capital gains will be taxed in exactly the same way regardless of whether or not the fund’s members have paid Division 296 tax along the way.

Doesn’t that mean capital gains are taxed twice? Once under Division 296 and then again when the assets are sold?

Yes – but that was the Government’s intention. They proposed Division 296 tax as an entirely separate (and additional) tax.

What if assets go backwards, is there a Division 296 tax refund?

No. If a member’s super balance falls they might create a loss they can carry forward for Division 296 tax purposes and it can be used to reduce future Division 296 tax amounts but there is no refund.

Consider Brad, from our earlier example, with a $5.5m TSB at 30 June 2026.  What if – in the following year – Brad’s fund sells some of its assets and ends up getting much lower prices than the trustee anticipated.  At 30 June 2027 Brad’s TSB is only $5.2m after taking $100k in pension payments?

In 2026/27 Brad’s earnings for Division 296 tax will be:

$5.2m + $100k - $0 - $5.5m = -$200k

In other words, Brad’s earnings are actually a $200k loss.

Unfortunately Brad won’t get a tax refund – Brad will just be allowed to carry this loss forward and use it to reduce earnings in a future year.

Remember that in future years, Brad’s earnings for Division 296 tax will reflect anything that causes Brad’s TSB to increase.  This will include not just growth in the value of the fund’s assets but also other income the fund earns such as interest, rent, dividends etc

Do all withdrawals count – or just pension payments?

The “Withdrawals” that are added back when calculating earnings for this tax include anything the member has taken out of super – pension payments, commutations, lump sums from an accumulation account, “release authority” amounts (ie, amounts paid to the tax office because the member went over their contribution cap or had other taxes such as Division 293 or Division 296 tax).

What about inheriting a spouse’s super?

When a member of a couple dies, “something” needs to happen with their super. But the impact on the beneficiary’s Division 296 tax depends on how they get the money.

Firstly, if it is paid out of the super system entirely, inheriting super from someone else has no impact on the beneficiary’s Division 296 tax.

Where that changes is if the money stays in super and is paid to the beneficiary as a pension. The most common example here is when it’s paid to the spouse – either automatically continuing a pension that was already in place for the deceased (a “reversionary pension”) or starting a new pension for the beneficiary from the deceased’s super.

In both cases, the deceased’s super effectively becomes part of the beneficiary’s super – and so it counts for Division 296 tax.

Importantly the initial “inheritance” is treated as a contribution (so that means it doesn’t form part of the beneficiary’s earnings in that year). But of course it will mean their total super balance goes up – increasing their Division 296 tax if they’re already paying it or perhaps putting them into Division 296 territory for the first time.

For example, Paul has $2.5m in a superannuation pension at 30 June 2025.  During 2025/26, Paul’s spouse (Kim) dies and Paul inherits Kim’s $2m pension.

Paul decides to keep the reversionary pension running and rolls his own pension back to accumulation - leaving all the money in superannuation. During the year Paul’s balance increases with earnings, Paul takes pension payments of $100,000 and at 30 June 2026 Paul has a total of $4.2m in superannuation.

All of a sudden someone who never expected to be included in this measure will be.