30 Apr Division 296 Tax: What Australians with Larger Super Balances Should Know

Division 296 Tax: What Australians with Larger Super Balances Should Know

Superannuation is often one of the most tax-effective ways to save for retirement. But when the rules change, it can be difficult to know whether you need to act, wait, or simply keep an eye on things.

Division 296 tax is now law and will apply from the 2026–27 financial year. It will not affect most Australians. However, if your total super balance is above, or approaching, $3 million, it is worth understanding how the new rules work and what planning questions to ask.

The main message is simple: do not panic, but do not ignore it either.

What is Division 296 tax?

Division 296 is an additional tax that applies to some people with very large superannuation balances.

From 1 July 2026, people with a total superannuation balance above $3 million may pay additional tax on the portion of super earnings linked to the balance above that threshold. A further tier applies for balances above $10 million.

The tax is part of the Federal Government’s “Better Targeted Super Concessions” reforms. The legislation has passed Parliament and is now in force, with supporting regulations still being developed.

In plain English, the rules are designed to reduce the tax concessions available to people with very large super balances. They do not remove the ability to hold large balances in super, but they may reduce some of the tax advantage on earnings above the relevant thresholds.

Who is likely to be affected?

Most Australians will not be affected.

Division 296 is aimed at individuals with a total super balance above $3 million. This includes super across all funds, not just one account.

You may need to pay closer attention if you:

• have a super balance near or above $3 million
• have multiple super accounts
• are a member of a self-managed super fund, or SMSF
• hold property, business real property or other large assets inside super
• expect to sell a business or receive a major contribution into super
• have a defined benefit interest
• are part of a couple where one person has most of the super wealth.

For many people, the issue will not be whether they are affected today. It will be whether their balance could move above the threshold in future through investment growth, contributions, asset sales or inheritances.

The key thresholds

There are two main thresholds.

The $3 million threshold

If your total super balance exceeds $3 million, additional tax may apply to the portion of super earnings linked to the amount above $3 million.

For example, if your total super balance is $4 million, then $1 million is above the threshold. Broadly, Division 296 looks at the proportion of your balance above the threshold and applies the additional tax to the relevant share of earnings.

The $10 million threshold

A second threshold applies for very large balances above $10 million. The Parliamentary Library noted that the legislation reduces concessions for balances above $3 million, with a further reduction for balances above $10 million.

This higher threshold will only affect a small group, but it is particularly relevant for people with large SMSFs, business real property, farms, private company interests or other substantial assets inside super.

What changed from the earlier proposal?

The final law differs from the earlier proposed version in some important ways.

One of the most significant changes is that the final model does not tax unrealised capital gains in the same way as the earlier proposal. This was a major concern under the original design, because it could have created tax liabilities on paper gains before assets were sold.

MLC notes that the passed version includes changes to how taxable super earnings are calculated, including adjustments designed to exclude certain capital gains that accrued before the start of the regime.

This is important for SMSFs and large-balance members with long-held assets. For example, a property purchased many years ago may have increased significantly in value before the new rules begin. The treatment of that pre-commencement growth is a key planning and record-keeping issue.

When does Division 296 start?

Division 296 applies from the 2026–27 financial year, which starts on 1 July 2026. The ATO has confirmed that Better Targeted Super Concessions, including Division 296, will apply from the 2026–27 financial year onwards.

The first practical testing point many affected people will focus on is likely to be 30 June 2027.

That gives people time to review their position before the rules first apply. However, it does not mean decisions should be rushed. Moving money out of super can have tax, estate planning, Centrelink, asset protection and investment consequences.

A simple example

Consider Helen, aged 62.

Helen has:

• $4 million in total super
• no other major investment structure outside super
• a mix of listed shares, cash and managed funds in her SMSF.

Helen is $1 million above the $3 million threshold.

That does not mean her whole $4 million balance is subject to the additional tax. It also does not mean she should automatically withdraw $1 million from super.

Instead, she should review:

• how much of her balance is above the threshold
• what earnings may be exposed to Division 296
• whether she has enough liquidity to pay any tax
• whether money outside super would be taxed more heavily
• whether her estate plan still works
• whether her spouse has a lower super balance.

The right answer may be to make no change, gradually adjust the structure, or consider targeted withdrawals. It depends on her broader circumstances.

Example: a couple approaching retirement

David and Maria are both 58.

David has $3.4 million in super after years of strong contributions and investment growth. Maria has $900,000.

Their first reaction is to withdraw $400,000 from David’s super to bring his balance closer to $3 million.

But before doing that, they need to consider several questions.

Would the withdrawn money be invested in David’s personal name, where income may be taxed at his marginal tax rate? Would it be better to build Maria’s super balance over time, if contribution rules allow? Do they need the money outside super, or would it simply be moved into a less tax-effective environment? Would a withdrawal affect their estate planning?

For David and Maria, the issue is not just tax. It is balance, flexibility and long-term planning.

Example: an accumulator family

Priya and Sam are in their late 40s.

Priya earns a high income and has a super balance of $1.8 million. She is not affected by Division 296 now, but she continues to make concessional contributions and expects her balance to grow materially over the next 15 years.

For Priya, Division 296 is not an urgent problem. It is a planning signal.

She may want to review:

• whether ongoing concessional contributions remain appropriate
• how much wealth should be built inside super versus outside super
• whether contribution splitting to Sam could help even up their balances
• whether future business sale proceeds should go into super
• how investment growth could affect her projected balance.

The aim is not to avoid super. Super may still be highly effective. The aim is to avoid building a retirement structure without considering future thresholds.

Example: an SMSF with property

Robert and Jenny have an SMSF that owns a commercial property used by their family business.

The property has grown substantially in value. Their combined SMSF balance is above $5 million, but most of the fund is tied up in the property.

This creates two practical issues.

First, they need accurate records. SMSF trustees may need to ensure asset valuations and cost base information are properly documented before the rules start.

Second, they need to think about liquidity. If a future tax liability arises, the fund or members may need cash available. That can be harder when most of the wealth is held in one illiquid asset.

For SMSF trustees, Division 296 is not only a tax issue. It is also a governance, documentation and cash flow issue.

Why 30 June 2026 records may matter

For SMSFs, the period before 1 July 2026 is important.

MLC notes that SMSF trustees may have the ability to revalue fund assets at 30 June 2026 and record adjusted cost bases for Division 296 purposes, subject to the rules and required forms.

This may help separate gains that accrued before the new regime from gains that arise after it begins.

That could be relevant for SMSFs holding:

• commercial property
• residential property
• farms
• business real property
• private company interests
• unit trust interests
• long-held listed shares.

The practical point is straightforward: if you are an SMSF trustee and may be affected, good records matter. Do not assume this can be reconstructed easily years later.

Should you withdraw money from super?

Maybe, but not automatically.

Withdrawing money from super may reduce your exposure to Division 296. But it may also create other consequences.

Money held outside super may be taxed differently. Investment income may be taxed at your marginal tax rate. Capital gains tax treatment may change. Your estate planning may become more complex. Asset protection may be reduced. Centrelink outcomes may also need to be considered, depending on your situation.

For some people, keeping money in super may still be the better overall outcome, even with Division 296 tax.

A tax saving is only useful if it improves the overall result.

A practical decision framework

Before making changes, work through these five questions.

1. What is my total super balance?

Check all super interests, not just your main account. This includes SMSFs, retail or industry funds, pensions and other super interests.

2. Am I above the threshold, or just near it?

There is a difference between being clearly above $3 million and being close to it. Market movements alone may move you above or below the threshold.

3. What assets are inside super?

Liquid assets are easier to manage. Illiquid assets, such as property or private assets, may create valuation and cash flow challenges.

4. What would happen if I moved money outside super?

Compare the after-tax result, not just the Division 296 outcome. Consider personal tax, trust structures, companies, estate planning and investment flexibility.

5. What records do I need now?

For SMSFs, asset valuations and cost base records may be critical. This is especially relevant before 30 June 2026 and 30 June 2027.

Quick checklist

Before 30 June 2026

• Review your total super balance across all funds.
• Identify whether you may be above or near $3 million.
• SMSF trustees should review asset valuations.
• Check cost base records for long-held assets.
• Review whether your estate plan still works.
• Consider whether future contributions should be adjusted.

During 2026–27

• Monitor your projected 30 June 2027 super balance.
• Model the potential Division 296 impact.
• Check whether your fund has enough liquidity.
• Avoid rushed withdrawals.
• Seek advice before restructuring.

Ongoing

• Review contribution strategies each year.
• Consider spouse balance equalisation where appropriate.
• Keep SMSF documentation current.
• Review beneficiary nominations.
• Revisit your plan if markets, legislation or family circumstances change.

Common mistakes to avoid

Mistake 1: Assuming the tax applies to your whole super balance

Division 296 is aimed at earnings linked to the portion of your balance above the relevant threshold. It is not a tax on your entire super balance.

Mistake 2: Withdrawing money without modelling the outcome

Taking money out of super may reduce one tax issue but create another.

Mistake 3: Ignoring spouse balance differences

Couples should look at both members’ super balances. If one person has most of the super wealth, there may be planning opportunities over time.

Mistake 4: Leaving SMSF records too late

Valuations, cost base records and trustee documentation can be difficult to reconstruct later.

Mistake 5: Treating this as only a tax issue

Division 296 may affect retirement planning, estate planning, liquidity and investment structure. Tax is only one part of the decision.

The bottom line

Division 296 tax is now law and will apply from 1 July 2026. It is targeted at people with larger super balances, particularly those above $3 million.

For most Australians, nothing changes. For those who may be affected, the next step is not to make sudden withdrawals. It is to review your balance, understand your exposure and consider whether your current structure still makes sense.

Good planning will usually be measured, not reactive.

Speak with an adviser

If your super balance is approaching or above $3 million, or you are an SMSF trustee with significant assets, it may be worth reviewing your position before the new rules begin.

An adviser can help you assess the possible impact of Division 296 and consider your options in the context of your broader retirement, tax and estate planning strategy.

 

Important information and disclaimer

The information provided in this document is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide.

FinPeak Advisers ABN 20 412 206 738 is a Corporate Authorised Representative No. 1249766 of Spark Advisers Australia Pty Ltd ABN 34 122 486 935 AFSL No. 458254 (a subsidiary of Spark FG ABN 15 621 553 786)