Division 296: Understanding the Proposed $3 Million Super Tax and its Implications

Overview of the Division 296 Super Tax Proposal

The Australian Government has announced plans for a new tax on superannuation balances exceeding $3 million, commonly referred to as the Division 296 tax. If legislated, this measure, effective from 1 July 2025, would impose an additional 15% tax on earnings attributable to the portion of an individual’s super balance that exceeds $3 million. 

Importantly, this is not a flat tax on the entire balance; earnings on the first $3 million of your super remain taxed under the normal concessional rates (15% in accumulation, or 0% in pension phase), with only the earnings related to the excess above $3 million being subject to the extra 15% tax.

This proposal is separate from the existing superannuation tax framework – it doesn’t replace or change the current taxes your super fund pays on income or capital gains, but comes as an additional tax bill on top. The policy targets high-balance super accounts as a revenue measure, but it also marks a significant shift in how superannuation is treated for wealthier members. Division 296 would be administered by the ATO, which will calculate the liability and issue a tax assessment to affected individuals. You would have the choice to pay this bill personally or have it released from your super fund account.

Key Features of the Proposed Tax

The $3 million threshold applies to your total superannuation balance (TSB) across all super accounts. This includes all super funds and any self-managed super funds (SMSFs) you have, aggregated together. If your combined TSB is above $3 million at the end of a financial year, the Division 296 tax kicks in for that year’s earnings on the portion above the threshold.

The proposal calls for an additional 15% tax on earnings attributable to the balance exceeding $3 million. In effect, someone with a very large super balance could face up to 30% tax on part of their super earnings – 15% paid by the super fund in the usual way on realised income, plus another 15% paid via this new tax on the “excess” portion.

Earnings are defined as the annual change in your total super balance, after adjusting for contributions and withdrawals. This includes unrealised gains – increases in asset values that exist only on paper.

The ATO will use information from super funds to automatically determine who is liable for Division 296 tax each year and how much. No Division 296 tax will be payable until after the 2025–26 financial year.

How the Proposed Tax is Calculated

Step 1: Calculate your earnings for the year

Earnings are defined broadly as:

Earnings = Closing Balance – Opening Balance – Net Contributions

Where:

• Closing Balance = your total super balance at 30 June
• Opening Balance = your total super balance at 1 July
• Net Contributions = contributions made less withdrawals over the year

This figure includes both realised and unrealised gains.

Step 2: Determine the portion of your balance above $3 million

Proportion = (Closing Balance – $3 million) / Closing Balance

This gives the percentage of your balance that sits above the $3 million threshold. If your balance is below $3 million, no tax applies.

Step 3: Calculate the taxable earnings

Taxable Earnings = Earnings × Proportion

Only the earnings attributable to the portion of your balance above $3 million are subject to the new tax.

Step 4: Apply the 15% Division 296 tax rate

Division 296 Tax Payable = Taxable Earnings × 15%

This is the amount the ATO will assess and issue as an additional personal tax liability. You can choose to pay it personally or have it released from your super fund.

Why the Lack of Indexation and Taxing Unrealised Gains Are Controversial

The proposal would tax value increases on paper, before assets are sold. This could lead to unfair outcomes, potential double taxation, and cashflow issues for members who haven’t realised those gains.The $3 million threshold is proposed as a fixed cap, not indexed to inflation. Over time, many more people will surpass that mark, making it a creeping tax on a broader base.

Timeline and Key Dates to Note

The Division 296 tax is proposed to commence on 1 July 2025. The first testing date is 30 June 2026. While the proposal is still not legislated, the government has reaffirmed its intention to proceed. No one will receive a tax bill under this measure until sometime after July 2026.

Implications for High-Balance Super Members

Don’t rush to restructure without advice. Withdrawing funds may trigger unintended tax consequences.

Evaluate your projected balance and growth. Younger high-income earners may reach $3 million sooner than expected.

Plan for liquidity in your SMSF or super portfolio. Unrealised gain tax may require paying tax without a corresponding sale.

Consider contributions and retirement phase strategies. Splitting contributions or investing outside super may become more attractive.

Conclusion 

The Division 296 tax proposal introduces complexity and uncertainty for high-balance super members. Despite the additional tax, superannuation remains a powerful vehicle for retirement savings. 

At Jaquillard Minns, we can help assess your exposure and explore strategies to manage or reduce the impact. Contact us today for tailored advice to protect and optimise your wealth in light of the proposed rules.

Disclaimer: The information above is general in nature and not a substitute for personalised financial advice. Individual circumstances vary, so please consult with your advisor at Jaquillard Minns for guidance tailored to your situation.