In a nutshell, if it’s introduced as proposed, Division 296 tax will be a brand new tax that is related to superannuation but is completely separate (and on top of) all existing fund and personal taxes. The Government intends to apply this tax from 2026/27 onwards.
In any given financial year it will potentially apply to people who have more than $3m in super at the start or end of the year (ie, 1 July 2027 or 30 June 2028 for the Division 296 tax for 2027/28). There is a special rule for the first year of operation – 2026/27 – more on this later.
There will be two levels of extra tax – one that applies just to people with more than $3m in super and another that applies just to those with more than $10m in super.
It will be calculated as :
15% tax x the proportion* of super over $3m x superannuation earnings*
Plus 10% tax x the proportion* of super over $10m x superannuation earnings*
(* we’ll talk more about these terms shortly)
(When the Government talks about applying tax of 30% or 40% to people with high super balances, they’re adding these new tax rates to the 15% tax rate already paid by super funds. For example, 40% is 15% (tax paid by the super fund itself) + 15% + 10%.)
It will be a personal tax – ie the bill will initially go to the individual (or their personal tax agent) not their super fund (or their super fund’s tax agent).
Individuals will have 84 days to pay the tax but they can choose how they pay it. They can pay their Division 296 tax personally or elect to have the money released from their super fund. Even people who can’t normally access their super yet (because they’re too young) can elect to have this tax bill paid from their super.
People who have a particular type of super entitlement called a “defined benefit” will be able to defer paying any Division 296 tax that relates to their defined benefit until they start drawing on their defined benefit super (eg they start receiving a pension or are paid a lump sum).
A very small number of people are exempt from Division 296 tax entirely – they are typically minor or disabled children receiving a pension from a parent’s super after the parent has died and people who have at some point put money into super from what’s known as a “structured settlement” (which is a payout they might have received due to a serious injury).
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 $2m at 30 June 2025) can’t make any non-concessional contributions in 2025/26 without facing extra taxes for going over the cap on these contributions. And there are other special tax rules 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. In most cases, those changes only impact people with special benefits known as “defined benefits”. But if you are impacted by those changes, it’s important to understand that they 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.
The aim of this tax is that people with more than $3m or $10m in super don’t pay extra taxes on all of their super earnings. They will only pay Division 296 tax on a proportion of them. The proportion is designed to be a simple way to split up super earnings like this for someone with $15m in super:
So there are two proportions relevant here – the proportion that relates to the member’s super balance over $3m and the (smaller) proportion that relates to their super balance over $10m.
In its simplest form, these are worked out as follows:
|
TSB - $3m |
And |
TSB - $10m |
In other words, for someone with $15m in super, the two proportions would be:
|
$15m - $3m |
= 80% |
And |
$15m - $10m |
= 33.33% |
And if their super earnings amount was $500,000, they would pay Division 296 tax of:
15% tax x 80% x $500,000 + 10% tax x 33.33% x $500,000 = $76,665
When is the TSB worked out?
Obviously the critical amount for this calculation is the member’s TSB. But this changes all the time. So when do we work it out?
For Division 296 tax, we look at the member’s TSB at both the start of the year and end of the year and take the larger one. For most people, the larger will be their TSB at the end of the year – because typically super balances grow over time. But for people who, for example, take a lot of money out of super that year, the higher TSB might be at the start of the year. If so, their TSB at the start of the year would be used to calculate their Division 296 tax.
There is a special rule for the first year, 2026/27. The Government knows that some people might want to take out some of their super before the new tax comes in. To give them time to make adjustment, there is a special rule for the first year : only the end of year TSB will be taken into account when calculating the proportion. This means someone with less than $3m in super at 30 June 2027 will not pay Division 296 tax for 2026/27 no matter how much they had in super at the start of the year.
Some examples:
Example 1
Michael’s TSB was $15m at 30 June 2026 and $2.9m at 30 June 2027.
For the first year of operation, we only look at the end of year amount ($2.9m) for Michael’s Division 296 tax.
It is less than $3m.
That means his proportion is nil%. He will pay no Division 296 tax for 2026/27.
In 2027/28 Michael’s TSB grows to $3.5m.
In 2027/28 we calculate Michael’s proportion and tax as follows:
Step 1: work out which TSB to use.
Which is higher? Michael’s TSB at the start of the year ($2.9m) or end of year ($3.5m) – in this case, we’ll use $3.5m to calculate his proportion.
Step 2: work out the proportions
|
$3.5m - $3m |
= 14.29% |
And |
$3.5m - $10m |
= N/A |
15% tax x 14.29% x super earnings + 10% tax x 0% x super earnings
Example 2
Jason has $11m in super at 30 June 2027 and $3m in super at 30 June 2028. For his Division 296 tax for 2027/28, we compare his TSB at the start of the year ($11m) with his TSB at the end of the year ($3m). This time, it’s the TSB at the start of the year that’s higher and 2027/28 is not the first year of the new tax. So we use $11m to work out Jason’s proportion.
($11m - $3m) ÷ $11m = 72.73% (rounded to 2 decimal places)
($11m - $10m) ÷ $11m = 9.09% (rounded to 2 decimal places)
That means Jason’s Division 296 tax for 2027/28 will be worked out as:
15% tax x 72.73% x super earnings + 10% tax x 9.09% x super earnings.
Importantly, when calculating the proportion, it doesn’t matter when the earnings occurred during the year or how much has been withdrawn from or contributed to superannuation during the year. All that matters is the TSB at the start and end of the year.
This happens in three parts.
First, we work out an amount called “Division 296 fund earnings”. As the name suggests, that’s an amount that is worked out for the whole fund.
Second, we split that Division 296 fund earnings amount between all the members to come up with the “relevant fund earnings” amount for each member.
Finally, for any individual, their “earnings” amount for Division 296 purposes is the “relevant fund earnings” amounts for each of their super funds added together.
Division 296 fund earnings
The starting point for Division 296 fund earnings (ie, the earnings for the fund as a whole) is the fund’s taxable investment income. In other words, the starting point is that we include all the things a fund would normally pay tax on – rent, interest, dividends (including franking credits), capital gains (discounted where relevant) less tax deductible expenses.
Some funds get a special exemption on some of their investment income because they are paying pensions. For the Division 296 calculation, we ignore that and imagine there were no pensions in place at all.
The amount is subject to an overall minimum of $nil. In other words, Division 296 fund earnings can never be negative (which would provide a refund instead of levying a tax).
When it comes to selling assets and realising capital gains:
- Capital gains and losses are generally treated in the usual way – ie, capital losses (even those carried forward before 1 July 2026) are offset against capital gains and only the net amount (less a 1/3rd discount for assets owned by the fund for more than 12 months) is included,
- If capital losses are larger than capital gains in a particular year, the loss is carried forward and used to reduce taxable income (and Division 296 fund earnings) in a future year,
- Capital gains are included in Division 296 fund earnings in the same year they’re included in the fund’s taxable income – that means Division 296 tax could be very high in years a major asset is sold. Unlike the Government’s original proposal, however, there is no tax on unrealised capital gains.
- In addition there are special rules for funds that have built up large gains on assets they haven’t sold yet at 30 June 2026 – we cover these later.
Special rules apply for funds providing defined benefits – including SMSFs. We haven’t covered these here.
For example, Jamie & Jason both belong to an SMSF – their super balances are $5m and $6m respectively (so the fund is worth $11m in total), and both of them have a $2m retirement phase pension included in this balance. The income shown on their SMSF’s tax return includes the following amounts:
|
Concessional contributions |
$60,000 |
|
|
Dividends |
$500,000 |
(plus $214,000 in franking credits) |
|
Interest |
$30,000 |
|
The fund incurred $10,000 in investment expenses during the year.
The Division 296 fund earnings amount would be $734,000 (is, $500,000 + $214,000 + $30,000 - $10,000).
See how we ignored the fact that some of this income would be tax exempt in the fund’s tax return because of the pensions? That’s because Division 296 tax is based on all of the fund’s earnings, even earnings on pension accounts.
And notice we also ignored the $60,000 in concessional contributions? That’s because Division 296 tax is all about taxing investment earnings, not contributions.
If the fund had sold assets during the year, the taxable capital gains would have been included in the above. Some special adjustments would then be made for any funds that receive the special treatment for assets they bought before 1 July 2026 (more on this shortly).
Relevant fund earnings
Next, the total amount of Division 296 fund earnings needs to be split up between all the members of the fund.
The way this is done depends on what type of super fund(s) the member belongs to. Large super funds such as industry or retail funds (ie, non SMSFs) will each work out their own calculation. They might be different depending on which fund the member belongs to, the type of investments they hold etc. The fund just needs to find a method that’s fair and reasonable for that fund’s members.
But SMSFs will all be the same. Each SMSF with people impacted by this tax will need a special (new) kind of actuarial certificate that provides the split between each member.
The actuary will work out the average value of each member account over the year and compare it to the average balance of the fund as a whole, to come up with an actuarial percentage for each member account in the SMSF. Each member’s relevant fund earnings is then their percentage of the overall Division 296 fund earnings above.
For example, in Jamie and Jason’s case, let’s say the actuary certified that Jamie’s share should be 45% and Jason’s 55%. Their earnings would be worked out as follows (remember the Division 296 fund earnings were $734,000):
|
|
Jamie |
Jason |
|
Actuarial % |
45% |
55% |
|
Relevant fund earnings |
$330,300 |
$403,700 |
Completing the example
The table below sets out Jamie and Jason’s Division 296 tax calculations if we assume their total super balances are as shown:
|
|
Jamie |
Jason |
|
Total super balance at: |
|
|
|
End of previous year |
$5,000,000 |
$6,000,000 |
|
End of current year |
$5,460,000 |
$6,560,000 |
|
|
|
|
|
Higher of the two |
$5,460,000 |
$6,560,000 |
|
% over $3m [A] |
45.05% |
54.27% |
|
% over $10m [B] |
0.00% |
0.00% |
|
|
|
|
|
Relevant fund earnings |
$330,300 |
$403,700 |
|
Division 296 tax |
$22,320.02 (15% x 45.05% x $330,300 plus 10% x 0% x $330,300) |
$32,863.20 (15% x 54.27% x $403,700 plus 10% x 0% x $403,700) |
If Jamie or Jason had super in other funds during the year, the relevant fund earnings from those super balances would be added into this calculation and their Total super balance would reflect all of their super added together.
Excluded earnings
Some people are included in the Division 296 tax rules but the earnings on some or all of their super balances are excluded from the calculations. Typically this applies to judges, senior public servants etc for the super they have in special super schemes for those roles. They don’t pay Division 296 tax on their earnings from these super schemes.
This is different to being exempt from Division 296 tax entirely because it means their super is still all added together to work out whether they’re over $3m or $10m (including any super in these special schemes) which might mean they pay extra Division 296 tax on the earnings in their other super funds (eg an SMSF).
Earnings calculated differently
All these calculations are for people who have normal super accounts that go up and down with the fund’s investments.
But people with special super known as “defined benefits” are treated differently. There is an entirely separate earnings calculation for them and we have not covered it here.
The draft legislation specifically recognises that some funds have owned assets for a long time and they’ve already grown a lot in value since they were first purchased. It would be unfair to apply Division 296 tax to all that historical growth.
So there is special relief to essentially “protect” that historical growth from Division 296 tax when working out how much of the fund’s capital gains should be included in Division 296 fund earnings.
How this special relief is achieved is different for SMSFs compared to other funds such as industry and retail funds.
Capital gains relief for SMSFs
For SMSFs, the relief is provided via a special adjustment to the cost base of all the assets it owns at 30 June 2026 (essentially they’re set at the market value at 30 June 2026 rather than their original purchase price).
For example, an SMSF taking advantage of this relief might own a property it purchased in 2015 for $1m. At 30 June 2026 it’s worth $2m. It’s sold in 2028 for $2.5m. Assume the fund doesn’t provide any pensions yet.
The SMSF will pay tax on all of the capital gain (less the 1/3rd discount). In this example, the amount subject to tax would be $1m ($2.5m less $1m, discounted by 1/3rd). In other words, the relief doesn’t change the tax paid by the fund at all.
For Division 296 tax, however, the amount included in earnings would be much smaller. The starting point would be a reduced capital gain ($2.5m less an adjusted cost base of $2m, being the value of the property at 30 June 2026). After the 1/3rd discount, this is only $0.33m. In other words, only $0.33m would be included in the Division 296 fund earnings rather than $1m.
The relief will be invaluable for those whose SMSFs have built up large capital gains at 30 June 2026.
The relief isn’t automatic – SMSFs have to specifically opt in via an approved form before their 2026/27 annual return is due.
It’s also an “all or nothing” decision – funds can’t opt in to the relief for just some assets, they have to opt in for all assets or none at all. This means SMSFs with some assets in a loss position at 30 June 2026 will need to carefully consider whether the relief is worthwhile before making the decision.
The ability to opt into this relief isn’t limited to just those who are already caught by Division 296 tax. Any fund can take advantage of it.
Capital gains relief for other funds
The approach for other funds will be completely different and very approximate.
Non SMSFs will not adjust cost bases of existing assets or make other adjustments that are specific to the actual investments held at 30 June 2026.
Instead, for the first 4 years (2026/27 – 2029/30 inclusive) there will be an arbitrary reduction (to be set out in the regulations) in the fund’s net capital gains on the assumption that they “probably” included the sale of some pre-2026 investments. More detail will be provided in the regulations.