Division 296 Super Tax: What Does it Mean for Your Superannuation

The Australian Government has proposed a new “Division 296” superannuation tax, aimed at super balances over $3 million. This measure introduces an additional 15% tax on certain earnings for individuals whose total superannuation balance exceeds $3 million at the end of a financial year. In plain terms, it’s an extra tax targeting the investment earnings on very large super accounts.

This proposal has garnered plenty of attention and confusion especially among high-net-worth individuals and business owners who have diligently built substantial retirement savings. Below, we break down what Division 296 Super Tax entails, how it would work, who is likely to be affected, and what strategic steps you might consider. Our goal is to explain the key points in a clear, professional, yet accessible way so you can plan ahead with confidence.

Concerned about how the new super tax could affect your retirement plans? Contact Cordner Advisory today to discuss how we can help protect your wealth.

What Is the Division 296 Super Tax?

Division 296 Super Tax is a proposed change to Australia’s superannuation tax rules that would impose an extra 15% tax on a portion of earnings for individuals with very large super balances. It’s often informally referred to as the “$3 million super tax” because of the threshold that triggers it.

Here are the basics of what’s being proposed:

Extra 15% Tax on Earnings Above $3M: If your combined superannuation balance across all accounts is over $3 million on 30 June of a given year, the investment earnings attributable to the balance above $3 million would incur an additional 15% tax. This tax is on top of the standard 15% tax that typically applies to super fund earnings in accumulation phase (or 0% in pension phase). Essentially, the portion of your earnings related to your balance beyond $3 million would face a total effective tax of 30%.

Applies to All Your Super Accounts: The $3 million threshold isn’t per account or per fund it’s based on your Total Superannuation Balance (TSB) aggregated across all super funds. This includes any self-managed super funds (SMSFs), retail or industry funds, and even defined benefit scheme interests you might have. Everything is added up to determine if you exceed the $3 million mark.

Not Law Yet (as of 2025): It’s important to note that, at the time of writing, Division 296 is still a proposal and not yet enacted into law. The government initially announced plans for this measure to start from 1 July 2025, meaning the first assessment of balances would be at 30 June 2026. However, it must pass through Parliament before it takes effect, and details could change. We are essentially planning based on the government’s announcements to date.

Why Introduce This Tax? The rationale given for the new tax is to ensure superannuation tax concessions are “better targeted.” In practice, it means slightly winding back the generous tax-free or low-tax treatment that very large super balances currently enjoy. Only a small percentage of Australians have over $3 million in super (roughly the top 0.5% of accounts), and this measure is intended to make the system more equitable and improve the budget bottom line. That said, it has been controversial critics argue it taxes unrealised gains (more on that shortly) and that the $3 million threshold is not indexed, so more people will gradually be caught by this tax over time.

How Does the $3 Million Super Tax Work?

Understanding how the Division 296 tax would be calculated is key. It’s a bit technical, but in essence it works like a pro-rata tax on the earnings of your balance above $3 million. Let’s break down the mechanics in simple terms:

Annual Test at 30 June: At the end of each financial year (30 June), the total balance of your superannuation accounts is measured. If the total is above $3 million, then you’ll potentially have a Division 296 tax liability for that year. If your total super balance is $3 million or below, you won’t be subject to this new tax for that year.

Tax on Proportion of Earnings: The additional 15% tax doesn’t apply to your entire balance or even all your earnings it only applies to the portion of earnings attributable to the balance over $3 million. In other words, it’s prorated. For example, if you had a $4 million super balance at 30 June, the amount above the threshold is $1 million (which is 25% of your total $4 million). Therefore, roughly 25% of your super’s earnings for the year would be considered “above $3 million” and taxed an extra 15%. The remaining 75% of your earnings would not face this extra tax.

Example: Sam has a total super balance of $4 million at year-end. Over that year, his super investments earned $120,000. Since $1 million of his balance is above the threshold (25% of his balance), about 25% of his $120,000 earnings i.e. $30,000 is subject to the Division 296 tax. At 15% tax on that $30,000, Sam would incur an additional tax of $4,500. The other $90,000 of Sam’s earnings remain taxed at normal super rates (15% inside the fund, or 0% if in pension phase).

This example illustrates that while the headline sounds like “30% tax on earnings above $3M,” in practice you’re taxed only on the slice of earnings proportional to the amount over the threshold. If you are just barely over $3 million, the extra tax is quite small. As balances rise well beyond $3 million, the portion of earnings taxed at the higher rate grows.

Calculation of Earnings: How do we determine “earnings” for this tax? Division 296 uses a concept of “superannuation earnings” which is essentially the growth in your total super balance over the year, after adjusting for contributions and withdrawals. This means both realised and unrealised gains on your investments count. For example, if your balance increased due to investment growth (even if assets weren’t sold), that increase is part of your earnings. If you made contributions or took out withdrawals during the year, those are factored in so that only the net investment gain is considered. This approach is why some say the tax can apply to unrealised gains your assets might have simply risen in value on paper, yet that counts toward the earnings being taxed.

Exclusions for Certain Events: Not all balance increases are treated as taxable earnings. Notably, if you receive certain one-off contributions like personal injury settlements (structured settlements) or if you’re a beneficiary of a deceased estate’s super transfer, these specific cases are excluded from the Division 296 tax calculations. Likewise, children receiving super pensions are excluded. These carve-outs prevent unusual situations from unintentionally triggering the tax.

Personal Tax Assessment: If you do have to pay Division 296 tax, it will be assessed to you personally by the ATO after the end of the financial year. It’s not automatically withheld by your super fund. You would receive a notice of the additional tax amount. You’ll have the option to pay that tax bill from your own personal funds or to authorize a release of money from your super fund to cover it. (The government is expected to set up a mechanism similar to how high-income earners can release funds to pay Division 293 tax.) This means you should be prepared for the cash flow of that tax either having liquid funds available in your super or ready access to cash personally.

Feeling overwhelmed by the complexity of this new super tax? You don’t have to figure it all out alone. Contact Cordner Advisory for expert guidance on how these rules may affect you and what planning steps you can take.

Who Will Be Affected?

The Division 296 super tax is squarely targeted at individuals with very large retirement savings. Let’s put it in perspective:

High-Net-Worth Individuals: Only a small fraction of Australians have over $3 million in super. Estimates suggest roughly 80,000 people (around 0.5% of superannuation members) currently exceed this balance. These are typically high-net-worth individuals for example, successful business owners, long-term high income earners, or those who have received large windfalls (such as the sale of a business or significant inheritance rolled into super). If you’re in this category or nearing it, you’re the group at which this tax is aimed.

Couples and Balance Distribution: The $3 million threshold applies per individual, not per household. This means a couple could theoretically have up to $3 million each in super without either triggering the tax. However, if one spouse holds the majority of the super savings for the family (common in cases where one partner made most of the contributions or had a big defined benefit), that individual might be over the threshold while the other is under. In such scenarios, only the individual above $3 million faces the tax. This opens up some potential strategies, like rebalancing super balances between spouses, which we’ll touch on later.

Future Growth of Affected Population: Because the $3 million cap is not indexed to inflation (at least not at the outset of the proposal), more people will gradually find themselves in this boat over time. Investment growth and ongoing contributions mean that someone with, say, $2 million in super today could exceed $3 million in a decade or two. Likewise, as wages and super contribution caps increase, it’s conceivable that younger professionals in high-paying industries may eventually reach the threshold. So even if you’re not at $3 million yet, it’s wise to be aware of this tax for long-term planning.

Retirees in Pension Phase: Many with large balances are retirees drawing pensions from their super. Remember that currently, investment earnings on assets supporting retirement phase pensions (within transfer balance cap limits) are tax-free in the fund. The new tax changes the equation for those large balance retirees even though part of their super is in a tax-free pension environment, the portion of balance above $3 million would now generate a tax bill on its earnings. The majority of individuals with balances over $3 million are in their 60s and 70s, so this measure will primarily impact older Australians with significant super wealth.

In short, if your total super is well under $3 million, this change won’t affect you immediately. If you’re approaching that level or already beyond it, you’ll want to pay attention and possibly start planning for the implications.

Strategic Considerations: What Can You Do?

If you are likely to be affected by the Division 296 super tax (or even on the cusp of it), there are several prudent steps and strategies to consider. Good planning can help manage the impact of the new tax and avoid any unwelcome surprises. Here are some key considerations:

1. Review Liquidity and Cash Flow: Ensure your super fund (especially if you have an SMSF) has enough liquid assets or cash to cover a potential tax bill. The Division 296 tax will be calculated after year-end and you might choose to pay it from your super. That means your fund could need to free up cash. Illiquid assets like property or private investments might pose a challenge if a large tax bill arrives. Planning for liquidity whether by maintaining a cash reserve or other easily sold investments is wise so you’re not forced into selling assets at the wrong time.

2. Keep Asset Valuations Up to Date: Your total super balance is measured based on the market value of assets at 30 June. For SMSFs or those with property or unlisted assets, ensure valuations are accurate and up-to-date each year. Understating values could lead to compliance issues, while overstating could unnecessarily push you over the threshold. Proper valuations will ensure the tax is calculated fairly and also help you know where you stand relative to that $3 million line.

3. Plan the Timing of Large Transactions: If you’re considering major contributions, rolling over funds, or commencing a pension, be mindful of the timing. For instance, making a large contribution or transferring other savings into super just before 30 June could tip you over $3 million at the assessment date. You might decide to stagger contributions over multiple years or delay a transaction to stay under the threshold at year-end. Similarly, if you are looking to withdraw a lump sum or roll benefits out of super, the timing around 30 June could affect whether you fall below the threshold for that year’s test. In short, be strategic with the timing of big moves in or out of super.

4. Consider Rebalancing Between Spouses: Couples with uneven super balances might look at strategies to even out their holdings if one person is above $3 million and the other is not. While you can’t directly transfer super to your spouse (except via contributions like spouse contributions or splitting eligible contributions), you could potentially reallocate future contributions to the lower-balance spouse, or if retired, consider withdrawing an amount from the higher-balance person and re-contributing to the other (bearing in mind contribution caps and eligibility). The goal is to make use of each partner’s $3 million cap where possible, rather than one person having, say, $6 million and incurring extra tax while the other has very little. Splitting super balances within a couple can be a useful tool to reduce overall tax, although it needs to be done carefully and in line with regulations.

5. Weigh Pros and Cons of Withdrawals: Some individuals above $3 million might consider pulling funds out of super to invest elsewhere, aiming to reduce the super balance subject to this tax. Before doing this, it’s crucial to compare the tax outcomes. Money outside super might be subject to higher marginal tax rates on earnings (up to 47% personally, or 30% in a family trust/company structure), which could be more than the 30% effective tax inside super for those excess amounts. However, money outside super isn’t subject to future super policy changes or potential death benefit taxes to non-dependants. It’s a complex decision and not one-size-fits-all. Professional advice is highly recommended to evaluate whether keeping funds in super (even with the new tax) or withdrawing some makes the most sense for your situation.
   

6. Stay Informed and Seek Advice: This is a significant change in the super landscape, and the rules and thresholds could evolve. Stay updated on the progress of the legislation. If it passes, make sure you understand the effective dates and any transitional rules. Most importantly, consult with a qualified financial adviser or accountant (like our team at Cordner Advisory) to review your specific circumstances. Everyone’s situation is different factors like your age, whether you’re in accumulation or pension phase, your other income, estate planning goals, etc., all matter in determining the best strategy. Proactive planning can help minimize unnecessary tax and ensure your retirement plans stay on track.

Unsure about the best strategy to manage your super balance and taxes? Contact Cordner Advisory for a complimentary consultation. Our experts can provide personalized advice to help safeguard your wealth under the new rules.

Conclusion: Be Prepared for Change

The Division 296 super tax represents a targeted change aimed at those with very large superannuation nest eggs. While it will only impact a small minority of super fund members initially, it’s a change that high-net-worth individuals should take seriously. If you’re above (or nearing) the $3 million threshold, now is the time to start planning for its implementation, reviewing your balance, considering potential strategies, and ensuring you have a plan for any extra tax that might become payable.

It’s worth emphasizing that at the time of writing this article, the measure is still pending legislation. Changes could occur in the final law, or it could even be deferred. Nonetheless, given the government’s commitment to the policy, it’s prudent to assume it (or something similar) will come into effect. Being caught off guard by a large tax bill in a couple of years’ time is not a pleasant prospect, so early preparation is key.

In summary, Division 296 is about ensuring the sustainability and fairness of the super system by having those with multimillion-dollar balances contribute a bit more in tax. With smart planning, you can manage this extra tax without it derailing your retirement objectives.

If you have questions about how Division 296 might affect you, or you need help with strategies to optimize your situation, don’t hesitate to reach out to a professional adviser.

Ready to navigate these changes with confidence? Contact Cordner Advisory today to speak with one of our advisers. We’re here to help you adapt to the new super tax rules and make the most of your retirement savings.