Understanding the New Superannuation Tax and What SMSF Trustees Can Do Now
If you’re an SMSF trustee with more than $3 million in superannuation, you’ve likely heard something about the Division 296 superannuation tax. Perhaps you’ve read alarming headlines about new taxes or heard that you should urgently withdraw funds before June 2027.
The reality is more nuanced, and potentially less dramatic, than many of these headlines suggest. Let’s cut through the noise and look at what Division 296 actually means for you.
What is Division 296?
Division 296 is proposed new tax legislation targeting individuals with total superannuation balances exceeding $3 million. It’s part of the government’s ‘Better Targeted Superannuation Concessions‘ policy, aimed at reducing the tax advantages available to very large retirement balances.
Currently, superannuation earnings are taxed at just 15% in accumulation phase and 0% in pension phase. Division 296 proposes to add an additional 15% tax on earnings attributable to balances above $3 million, effectively creating a 30% tax rate on that portion.
For very large balances exceeding $10 million, there’s an even higher rate. Earnings attributable to amounts above $10 million will face an additional 25% (on top of the existing 15%), resulting in a 40% effective tax rate on that portion.
Treasury estimates approximately 90,000 Australians currently have balances exceeding $3 million, with around 8,000 holding balances above $10 million.
The Three Major Changes That Matter
The Division 296 proposal was first announced in 2023 and met with significant criticism. In October 2025, the government made substantial revisions that fundamentally changed the legislation. Understanding these changes is crucial, as much of the alarming commentary you may have read relates to the earlier, more problematic version.
1. No Tax on Unrealised Gains
This is the most significant change. The original proposal would have taxed paper gains on assets you hadn’t sold – a major problem for SMSF trustees holding property or other illiquid assets. You could have faced a tax bill without the cash to pay it.
The revised proposal shifts to a ‘realised earnings’ approach. You’ll generally only pay tax when gains are actually crystallised through asset sales. This aligns with normal income tax concepts and removes the most problematic aspect of the original design.
2. Thresholds Will Be Indexed
The original $3 million threshold wasn’t indexed to inflation. Over time, this would have captured more Australians simply due to inflation, even if their real wealth hadn’t increased.
The revised proposal indexes both thresholds to CPI. The $3 million threshold will increase in $150,000 increments, and the $10 million threshold in $500,000 increments. This means inflation won’t gradually drag more people into the tax over time.
3. First-Year Exemption Provides Adjustment Time
For the first year of operation (2026-27), only your balance at 30 June 2027 will be assessed, rather than both the start and end of the financial year. This gives you time to adjust your superannuation balance before the first assessment date, if you choose to do so.
How the Division 296 Superannuation Tax Works
Division 296 is calculated proportionally. It doesn’t apply to all your superannuation earnings, only to the portion that corresponds to your balance above $3 million.
For example, if your total balance is $4 million, the proportion above the threshold is 25% ($1 million divided by $4 million). Only 25% of your earnings for the year would be subject to the additional 15% tax.
This proportional approach means the actual tax impact for balances slightly above $3 million is relatively modest. Someone with $3.1 million in super would have only 3.2% of their earnings subject to the additional tax, not the entire balance.
Importantly, Division 296 is a personal tax, not a fund tax. The ATO will issue assessments directly to you, not to your SMSF. However, you can elect to have the tax paid from your superannuation fund, even if you haven’t reached preservation age.
Current Status and Timeline
The legislation is proposed to commence from 1 July 2026, with the first measurement and assessment occurring at 30 June 2027. The government released the draft legislation on 19 December 2025, with consultation closing in January 2026.
As at January 2026, Division 296 remains draft legislation subject to parliamentary passage. Given the Albanese Government’s return for a second term and reported support from other parties, passage is widely expected, though the final form may differ from the current draft.
What SMSF Trustees Can Do Now
The key message is: don’t panic, and don’t make hasty decisions based on incomplete information. Here’s a practical approach:
Understand Your Position
Calculate your total superannuation balance across all funds. Remember, the $3 million threshold applies to each individual, not to the SMSF as a whole. If your SMSF has $5 million but no individual member exceeds $3 million, Division 296 won’t apply.
Run the Numbers
For many SMSF trustees, the actual tax impact is smaller than the headlines suggest. Work with your adviser to model the proportional tax on your specific situation. The additional tax might be a few thousand dollars annually for balances in the $3-5 million range – significant, but potentially less dramatic than losing the ongoing tax advantages of superannuation entirely.
Consider Your Investment Strategy
With the shift to taxing realised gains, the timing of asset sales becomes more relevant. This doesn’t mean you should rush to sell property or other investments, but it does mean strategic timing of sales may become part of your broader investment planning.
Think About Multi-Member Funds
If your SMSF has multiple members, Division 296 earnings must be allocated between members. The draft legislation doesn’t specify exactly how this allocation should occur. Regulations will provide further details. This is an area where professional advice will be particularly valuable.
Review Estate Planning
The interaction between Division 296 and death benefits or intergenerational transfers is complex. If estate planning is part of your superannuation strategy, discuss the potential effect of Division 296 with your adviser.
Don’t Rush to Withdraw
Many trustees are receiving advice to withdraw funds before June 2027 to get below $3 million. This may be appropriate for some, but for others, the additional tax may be less costly than losing the ongoing tax advantages of superannuation. The first-year exemption gives you time to make an informed decision.
Wait for Final Legislation
The legislation hasn’t passed yet. While experts widely expect passage, the final form may differ from the current draft. Making irreversible decisions based on draft legislation carries risk. Monitor developments and be prepared to adjust your strategy once the legislation is finalised.
Getting Professional Advice
The interaction between Division 296 and your broader financial situation is complex and highly individual. Your investment strategy, retirement timeline, estate planning goals, and other tax considerations all play a role in determining the right approach.
If you have a superannuation balance approaching or exceeding $3 million, speak with a qualified financial adviser and tax professional who can provide advice specific to your circumstances. Generic advice based on headlines won’t serve you well – you need analysis based on your actual numbers and goals.
The Key Takeaway About Division 296
Division 296 is real and will likely become law, but the October 2025 revisions removed the most problematic aspects of the original proposal. For many SMSF trustees, the actual impact may be manageable, but only proper analysis of your specific situation will tell you for certain.
Need a hand?
Don’t let headlines drive your decisions. Synectic’s Advisers can help you understand how Division 296 really affects you, and support you to make informed choices based on your individual circumstances.
Important: This article provides general information only and does not constitute financial, tax, or legal advice. The information is current as at January 2026 and is based on draft legislation which may change before becoming law. You should seek professional advice tailored to your individual circumstances.
