BY WEALTH ADVISER
Imagine you have spent thirty years building your superannuation balance. You have maximised contributions, invested thoughtfully, and watched compound growth do its work inside one of the most tax-effective structures available to Australians. Then the rules change.
From 1 July 2026, a new layer of taxation — Division 296 — will apply to superannuation earnings attributable to balances above $3 million. A second, higher tier kicks in above $10 million. The government estimates that fewer than 0.5 per cent of Australians will be directly affected in the first year. But even if your balance is well below those thresholds today, this reform matters. It signals a shift in how Canberra views the purpose and limits of superannuation tax concessions, and it may shape the decisions you and your adviser make for decades to come.
How We Got Here
The original proposal, announced in February 2023, attracted fierce criticism. It would have taxed unrealised capital gains — meaning you could have owed tax on an increase in the value of property or shares inside your fund that you had not actually sold. The $3 million threshold was not indexed, raising concerns that inflation and compulsory contributions would push steadily more Australians above the line over time.
After more than two years of feedback, the government announced a significant rework in October 2025. Draft legislation was released for consultation in December 2025. The revised design addresses the two most contentious elements: unrealised gains are no longer taxed, and both thresholds will be indexed to inflation. The measure is proposed to commence on 1 July 2026, with the first assessments based on balances at 30 June 2027.
Whether or not the legislation has passed by the time you read this, the direction of travel is clear. Understanding what the tax does — and what it signals — is worth your time regardless of where your balance sits today.
What Division 296 Actually Does
Division 296 is a personal tax, levied on the individual rather than on the superannuation fund itself. It applies to people whose total superannuation balance — aggregated across all funds, including any SMSF — exceeds $3 million at the relevant measurement point.
The tax works proportionally. It does not apply to your entire balance or your total earnings. Instead, it applies only to the share of your fund’s earnings that corresponds to the share of your balance above the threshold.
There are two tiers. For the portion of your balance between $3 million and $10 million, an additional 15 per cent tax applies to the corresponding share of earnings. This brings the headline rate on those earnings to 30 per cent when combined with the existing 15 per cent concessional tax rate paid by the fund. For balances above $10 million, a further 10 per cent applies, bringing the combined headline rate on that portion to 40 per cent.
Both thresholds will be indexed to the Consumer Price Index, with the $3 million threshold increasing in $150,000 increments and the $10 million threshold in $500,000 increments. Indexation will only ratchet upward — the thresholds cannot decrease.
A critical design feature of the revised legislation is that earnings are now based on the fund’s realised income — interest, dividends, rent, and actual capital gains from assets that have been sold — rather than on changes in the total balance that might include unrealised paper gains. This is a fundamental improvement over the original proposal and removes the risk of being taxed on growth you have not yet received.
A Worked Example
Consider Margaret, who has a total superannuation balance of $4.5 million at 30 June 2027, held across an SMSF and an industry fund. Her funds report combined Division 296 earnings of $300,000 for the year.
The proportion of her balance above the $3 million threshold is $1.5 million out of $4.5 million — one-third, or 33.33 per cent. Her entire balance sits below $10 million, so the second tier does not apply.
Her Division 296 tax liability is 15 per cent of 33.33 per cent of $300,000, which comes to $15,000. She can choose to pay this from personal funds outside super or elect to have it released from one of her superannuation accounts.
The effective additional tax rate on Margaret’s total super earnings is 5 per cent — not 15 per cent, because the tax only applies to the proportion of earnings attributable to the balance above $3 million. The closer your balance is to the threshold, the smaller the proportional bite. The further above it, the larger the proportion of your earnings that attracts the additional tax.
For someone well above $10 million, the calculation becomes more complex as both tiers interact, and the effective rate rises accordingly. Your adviser can model the specific impact on your circumstances.
Why This Matters Even If You Are Below $3 Million
The government estimates that around 90,000 Australians — fewer than 0.5 per cent of account holders — will be affected at the $3 million level in the first year, with fewer than 8,000 at the $10 million level. For the vast majority, Division 296 will not appear on any tax assessment.
So why should you care?
First, the reform confirms that the government views superannuation tax concessions as subject to limits. The legislated objective of superannuation — to preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way — is now being actively used to justify reining in concessions for larger balances. Whether you agree with the policy or not, this framing has implications for how super may be treated in future budgets.
Second, while the thresholds will be indexed, some commentators have noted that super balances tend to grow faster than CPI over long periods, driven by compulsory contributions (now at 12 per cent of wages), voluntary topups, and investment returns. An Australian in their forties with $1.5 million in super today and strong earnings growth could plausibly approach $3 million by retirement. The indexation mechanism reduces the speed of bracket creep compared to the original unindexed proposal, but it does not eliminate it entirely. This is worth factoring into long-term planning conversations with your adviser.
Third, the structure of Division 296 — a proportional tax on a share of earnings above a threshold — creates a new set of planning considerations around where wealth is held, how assets are structured, and when capital gains are realised. These considerations affect not just those currently above $3 million but anyone making strategic decisions about how much to contribute to super versus investing outside it.
What Changed from the Original Proposal
Much of the public commentary still references the 2023 design. The revised legislation is materially different in several respects worth noting.
The most significant change is that unrealised gains are no longer taxed. The original proposal calculated earnings using the change in your total balance, capturing paper gains on assets you had not sold. The revised version uses realised earnings only — actual income and capital gains from disposals.
Both thresholds are now indexed to CPI, and a second tier at $10 million has been introduced — neither of which featured in the original design. The start date has shifted from 1 July 2025 to 1 July 2026, with the first measurement at 30 June 2027.
An integrity measure has also been added. From the 2027–28 financial year onward, the tax uses the higher of your total super balance at the start or end of the year, preventing someone from temporarily withdrawing a large sum just before 30 June to reduce their measured balance. A transitional concession applies in the first year (2026–27), where only the end-of-year balance is used.
Planning Considerations for Those Approaching or Above the Threshold
If your total super balance is near or above $3 million, several planning questions are worth discussing with your adviser sooner rather than later.
The first is whether super remains the most tax-effective structure for all of your wealth. Even with the additional tax, super may still offer a lower effective rate than holding the same assets personally or in a trust, depending on your marginal tax rate, the type of income the assets generate, and whether they are in accumulation or pension phase. The comparison is not straightforward, but your adviser can model the after-tax outcomes across different structures for your specific situation.
The second consideration is the timing of capital gains. Because the tax applies only to realised earnings, the year in which you sell an asset matters. Realising a large capital gain when your balance is well above $3 million will attract a higher proportional Division 296 charge than realising it when your balance is closer to the threshold. This does not mean deferring all asset sales — there are sound investment reasons to sell — but the timing and sequencing of disposals becomes a more consequential decision.
Third, for SMSF trustees, the cost-base reset mechanism is a significant transitional opportunity. SMSFs can elect to reset the cost base of all fund assets to their market value as at 30 June 2026, for Division 296 purposes only. Capital gains accumulated before the tax commenced will then not be caught when those assets are eventually sold. The election is all-or-nothing — you cannot cherry-pick assets — and must be made by the due date of the fund’s 2026–27 income tax return. Importantly, any SMSF can opt in, even if its members are currently below $3 million. This is a conversation to have with your SMSF accountant before the deadline.
Finally, the transitional rule for the first year creates a specific window. In 2026–27 only, the threshold test uses your balance at 30 June 2027 alone. Withdrawals made before that date can reduce or eliminate your Division 296 exposure for that first year. From 2027–28 onward, withdrawing during the year will not help if your balance was above $3 million at the start.
Superannuation Still Works
It would be easy to read about Division 296 and conclude that superannuation has lost its appeal. That would be a mistake.
For the vast majority of Australians, the tax environment inside super remains significantly more favourable than outside it. Contributions are taxed at 15 per cent — well below most people’s marginal rate. Investment earnings in accumulation phase are taxed at a maximum of 15 per cent, with a one-third discount on capital gains held longer than twelve months. In the retirement phase, earnings on assets supporting income streams are tax-free, up to the transfer balance cap of $1.9 million (2024–25, and expected to index higher in coming years).
Even for those above $3 million, the combined headline rate of 30 per cent on the excess portion remains competitive with personal marginal rates for high-income earners. Super does not become a bad deal at $3 million — it becomes a less generous deal on the margin.
The real implication is that the optimal mix of super and non-super wealth becomes a more consequential planning question. For some people, the answer will be to moderate future contributions as their balance approaches the threshold. For others, it will be to restructure how assets are held to manage the timing of realised earnings. For most, the right response will be to talk to their adviser about what the numbers look like in their specific situation.
Discussion Points for Your Adviser
Division 296 introduces planning considerations that interact with contribution strategy, investment structure, estate planning, and retirement income design. Several questions are worth raising at your next review.
Where does your total super balance sit relative to the $3 million threshold, and where might it be in five, ten, or fifteen years given your current contribution rate and expected investment returns? If your balance is approaching the threshold, what does the after-tax comparison look like between holding additional wealth inside super versus outside it — in your personal name, in a trust, or in a company structure? If you hold assets with significant unrealised capital gains inside an SMSF, have you discussed the cost-base reset election with your accountant, and is there a deadline you need to be aware of? Does the timing of any planned asset sales inside super need to be reconsidered in light of how Division 296 calculates the proportional tax? How does Division 296 interact with your estate plan — particularly if your super balance, combined with a reversionary pension from a spouse, could push the surviving partner above $3 million?
The legislation — the Treasury Laws Amendment (Building a Stronger and Fairer Super System) Bill 2026 — was introduced to Parliament on 11 February 2026 and is expected to be debated in March. It has not yet been enacted, and specific details may be subject to amendment during the parliamentary process. Your adviser can help you distinguish between strategies that make sense regardless of the final detail and those that should wait for legislative certainty.
The broader message is straightforward. Superannuation remains a powerful wealth-building tool for Australians at every level. Division 296 does not change that. What it does change is the calculus at the upper end — and for anyone planning over a multi-decade horizon, understanding that shift now is better than discovering it later.
References
• Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2025. Exposure draft released 19 December 2025. Consultation closed 16 January 2026. Available at treasury.gov.au.
• Australian Taxation Office. “Better targeted superannuation concessions.” ATO guidance on proposed Division 296 tax, updated for October 2025 revised design. ato.gov.au.
• Treasurer Jim Chalmers. Media release: “Reforms to support lowincome workers and build a stronger super system.” 13 October 2025, announcing revised Division 296 design including indexation, removal of unrealised gains taxation, and introduction of $10 million second tier.
• Heffron SMSF Solutions. “Division 296 Tax: Draft Legislation Released and Key Changes.” Analysis of cost-base reset mechanism, transitional rules, and SMSF planning considerations. December 2025.
• BDO Australia. “Understanding the new Division 296 tax changes.” Technical analysis of earnings calculation methodology, opt-in requirements, and member allocation rules. January 2026.
• Grant Thornton Australia. “Latest update on Division 296 tax as we begin 2026.” Overview of two-tier structure, indexation increments, and strategic planning considerations. January 2026.
• The Tax Institute. Submission on Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2025. January 2026.
• Superannuation Industry (Supervision) Act 1993 (Cth). Total superannuation balance provisions, contribution caps, and transfer balance cap ($1.9 million for 2024–25).
