The Federal Government has enacted legislation introducing the Division 296 tax, which is scheduled to commence from 1 July 2026. These changes are designed to reduce tax concessions on large superannuation balances, while addressing many of the concerns raised with the original proposal.
The legislation has now been passed by Parliament and is law. Below we outline the key features most relevant to our clients.
Who will be affected?
Division 296 will apply to individuals (not funds) whose total superannuation balance exceeds $3 million. The assessment will look across all superannuation interests held by an individual, including SMSFs, retail and industry funds, and certain defined benefit interests.
When does the tax start?
- The new rules commence from 1 July 2026.
- The first assessment year will be 2026–27, with the first relevant balance date being 30 June 2027.
This means there is no Division 296 tax payable before 30 June 2027, providing a transition period for planning.
How will member balances be measured?
A key refinement in the revised legislation is how the proportion of a member’s balance subject to Division 296 is determined.
From 1 July 2027 onwards, the calculation will be based on the highest of the member’s opening or closing total superannuation balance for the year, rather than just the year‑end balance.
This change is intended to prevent strategies that temporarily reduce balances at year‑end to avoid the tax.
Important transitional rule:
For the first year only (2026–27), the balance test will be based solely on the 30 June 2027 balance, not the opening balance.
What earnings will be taxed?
One of the most significant improvements in the revised proposal is the removal of the tax on unrealised gains.
Under the enacted legislation:
- Division 296 will apply only to realised earnings, aligning with existing income tax principles; and
- Unrealised gains (“paper gains”) will not be taxed.
Treatment of unrealised gains up to 30 June 2026
Crucially, the revised legislation confirms that:
- Unrealised capital gains accrued up to 30 June 2026 will not be subject to Division 296 tax, even if those assets are sold in later years.
- This effectively “resets” the Division 296 starting point, ensuring the tax only applies to gains that accrue from 1 July 2026 onwards.
For SMSFs and other funds with significant embedded gains, this represents an important protection against retrospective taxation.
How much additional tax will apply?
Under the enacted legislation, Division 296 introduces higher effective tax rates on earnings attributable to large superannuation balances, while leaving the existing fund-level tax rules unchanged.
The proposed framework operates as follows:
- Balances up to $3 million
Earnings will continue to be taxed under the existing rules (generally 15% in accumulation phase and 0% in retirement phase). - Balances between $3 million and $10 million
Earnings attributable to this portion of a member’s balance will be subject to an additional 15% Division 296 tax, resulting in up to a total effective tax rate of 30% on those earnings (being the existing 15% fund‑level tax plus the additional 15% Division 296 tax). - Balances above $10 million
Earnings attributable to this portion will be subject to a further 10% Division 296 tax, resulting in a total effective tax rate of 40% on those earnings (being the existing 15% fund‑level tax plus a 25% Division 296 tax).
Importantly:
- The tax is assessed to the individual, not the superannuation fund.
- Individuals may elect to release amounts from super to pay the liability, similar to the existing Division 293 regime.
- Both the $3 million and $10 million thresholds are proposed to be indexed, reducing the risk of bracket creep over time.
What should you be doing now?
Now that the legislation has passed:
- No immediate action is required for most clients.
- However, individuals with balances approaching or exceeding $3 million should begin factoring Division 296 into their long‑term retirement and investment planning.
- SMSFs with large unrealised gains should be particularly mindful of the transitional rules leading up to 30 June 2026.
We can now provide tailored advice based on the final law.
Next steps
If you would like to discuss how the proposed Division 296 changes may affect your circumstances, or to explore planning opportunities ahead of 1 July 2026, please contact our office.
Published 20 March, 2026