Lowdown on Division 296: How to prepare your clients

The article is relevant to members in Australia and was current at the time of publication.

Superannuation members with balances over A$3 million will soon need to pay additional tax on their investment earnings. This is following the passing of legislation in the Senate earlier this month that will take effect from 1 July 2026.

The Building a Stronger and Fairer Super System legislation has added the new Division 296 tax into the Income Tax Assessment Act 1997, applying a 15 per cent tax on superannuation earnings corresponding to the percentage of an individual’s Total Superannuation Balance (TSB) between A$3 million and A$10 million for an income year.

Division 296 tax adds to the existing 15 per cent tax already payable on earnings in superannuation accumulation accounts, essentially doubling the earnings tax rate on balances above A$3 million to 30 per cent.

The tax will also impose a further 10 per cent earnings tax rate on individuals with a TSB above A$10 million, taking their maximum tax rate payable from 15 per cent up to 40 per cent.

The A$3 million and A$10 million thresholds, which will be indexed to inflation, are to be based on a member’s highest TSB between the start and end of each financial year.

In-scope members will be able to access money from their superannuation fund to pay Division 296 tax via a release authority issued by the Australian Taxation Office.

It should be noted that the detailed regulations governing Division 296 are yet to be released.

Preparing for Division 296

There are several important aspects around the introduction of the Division 296 legislation that advisers and tax practitioners should be aware of.

The 2026–27 financial year (when the legislation will come into effect) is a transitional period, enabling TSBs to be valued as at 30 June 2027. This effectively means that in-scope members with a TSB close to either the A$3 million or A$10 million thresholds could choose to reduce their balance, if eligible, by withdrawing money or assets from their superannuation before 30 June 2027.

Assets reset

Superannuation funds, including self-managed superannuation funds (SMSF), will have an opportunity to adjust all their capital gains tax (CGT) assets held as at 30 June 2026 to their market value. Doing so would lock out any unrealised capital gains accrued on assets prior to 1 July 2026. However, it appears any CGT valuation resets must be done for all fund assets, not on an asset-by-asset basis.

“If SMSF trustees are planning this in advance, they probably need to look into getting valuations done earlier than what they would normally do for End of Financial Year reporting for their fund, because the legislation could put a strain on the availability of these resources,” says Richard Webb.

Tax implications on death 

“Division 296 tax adds to the underlying issues at the back end of superannuation when you pass away. Death benefits tax has always been there, generally affecting adult children who inherit superannuation. They can incur tax at 15 per cent or 17 per cent (including Medicare), while spouses and some other dependents are exempt,” says Shaun La Motte, a Director at RSM Australia who specialises in SMSFs and strategic advisory for high-net-worth individuals.

Division 296 can add another layer of tax as capital gains will be included when assets are realised to fund death benefit payments. Members in receipt of reversionary pensions could be included if their combined member balance exceeds A$3 million.

“Division 296 has highlighted the importance of planning, because all of a sudden, people now want to know more about their fund, the underlying assets and the associated tax consequences.”

Defined benefit interests

Another area attracting strong attention is the treatment of defined benefit interests under Division 296.

Defined benefit pensions will require an annual revaluation to determine if the A$3 million threshold is met. The tax would apply to the growth in the notional value of the pension, including indexation.

“There are clients who have some combination of a complying lifetime pension, maybe a small account-based pension and an accumulation interest,” says DBA Lawyers Director, William Fettes.

“You’re potentially combining two approaches there, where you have to work out whether they’re in scope or not, determine the earnings for the complying lifetime pension and then square off their share of the earnings under the normal approach, which is generally going to require an actuarial certificate to determine the share of the fund’s taxable income position.

“We’re really guessing exactly how that’s going to work because the subtleties are played out in the regulations, which we haven’t yet seen.”

Webb adds that SMSF trustees should be looking for financial advice now if they’re likely to be in scope for Division 296, so they are aware of all their options, not just in relation to the valuation of assets but in terms of their broader financial planning.

This may include getting advice on the optimal level of superannuation to hold, the tax consequences of moving assets between different funds and/or choosing to take assets outside of superannuation.