Written by Adam Dobeli 

The Federal Government’s proposed Division 296 tax has sparked significant discussion across the superannuation and financial services sectors and has garnered significant media attention recently. Set to commence from 1 July 2025, this new tax targets individuals with total superannuation balances (TSBs) exceeding $3 million.

Whilst this is only a proposed tax at this stage that is yet to be legislated and is subject to change, it’s important to understand what the proposed changes are, the government position on why it’s being introduced, and how it may affect retirement/superannuation planning.

Why a New Tax? The Government position…

Whilst the proposed Division 296 Tax has taken all the headlines recently, in late 2024 the government introduced the Superannuation (Objective) Act 2024. This new law states that the objective of superannuation is “to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”.

The reasoning for the introduction of this new tax appears to be for the government to meet its newly defined objective of super. Attempting to paraphrase various media conferences and communication released by the government, the argument/reasoning put forward by the government is that the current superannuation tax concessions disproportionately benefit high-wealth individuals, which is unsustainable and unfair.

Under existing rules, earnings on superannuation balances are taxed at a concessional rate of 15% during the accumulation phase and are tax-free in the retirement phase (up to the Transfer Balance Cap, which is $2 million for 2025–26).

The Division 296 tax aims to “better target” these concessions by imposing an additional 15% tax on earnings attributable to the portion of a person’s TSB that exceeds $3 million. This means that for affected individuals, the effective tax rate on some super earnings could rise to 30%.

Key Components of Division 296

 Here’s a breakdown of how the proposed tax works:

• Threshold: Applies only to individuals whose TSB exceeds $3 million at the end of a financial year.
• Tax Rate: An additional 15% on earnings attributable to the portion of the TSB above $3 million.
• Calculation Method: The tax is calculated based on the change in an individual’s TSB over the financial year, adjusted for withdrawals and contributions. This includes unrealised gains, meaning increases in asset values that haven’t been sold.
• Valuation Requirements: Accurate and regular market valuations of super assets are essential, especially for SMSFs with illiquid or complex assets 
• Indexation: in its current form, the $3M threshold will not be indexed for CPI
• Defined Benefit Funds: These are treated differently due to their unique structure. For members of defined benefit schemes (such as certain public sector funds), the tax is calculated annually but deferred until retirement

Worked Example

• Super balance at 30/06/2025 = $4 million
• Super balance at 30/06/2026 – $4.5 million
• Concessional contributions made in 2025/26 = $27,500
• Tax on concessional contributions at 15% = $4,125
• After tax contributions made = $23,375

Calculation of Div 296 Tax:

1. Adjusted TSB at Year-End:

• Balance at 30/06/2026 = $4.5 million
• Less: After tax contributions made = $23,375
• Adjusted TSB at year end = $4,476,625

2. Basic Superannuation Earnings:

• Adjusted TSB less opening Balance
• $4,476,625 – $4,000,000 = earnings of $476,625

3. Percentage of TSB over $3M:

• (Balance at 30/06/2026 less $3 million) / by Balance at 30/06/2026
• ($4.5 million – $3 million) / $4.5 million = 33.33%
• Percentage over TSB of 33.33%

4. Taxable Superannuation Earnings:

• Basic superannuation earnings x Percentage over TSB
• $476,625 x 33.33% = taxable super earnings of $158,859
  

5. Division 296 Tax:

• Taxable superannuation earnings x 15% tax rate
• $158,859 x 15% = Div 296 Tax of $23,829

Industry Response and Legislative Status

The proposal has faced strong opposition from industry bodies, which argue that taxing unrealised gains is unprecedented and could lead to liquidity issues for SMSF’s holding illiquid assets.

The industry bodies have also highlighted the administrative burden and complexities with this proposed tax, especially with valuation challenges for funds that have complex asset structures.

As of June 2025, the legislation has passed the House of Representatives but remains under debate in the Senate. Amendments have been proposed, and the final form of the law may still change.

What Should Clients Do Now?

While the legislation is not yet finalised, it is prudent for clients with super balances approaching or exceeding $3 million to:

• Review their current superannuation structure and asset mix
• Consider the liquidity of their SMSF assets
• Discuss potential strategies with their financial advisers

As accountants and tax agents, we can provide tax advice in respect of this proposed Division 296 tax but we cannot provide financial advice on what you should or shouldn’t do.

We will aim to keep our clients informed of any changes as the legislation progresses and we are happy to work with you and your financial adviser as required.

If you have any questions in relation to this proposed tax, or if you would like to discuss further, please do not hesitate to contact your HCQ adviser.