Proposed Division 296 - What High Balance Members Need to Know

The Proposal

The proposed Division 296 was originally put forward by the Federal Government in 2023 and was surrounded by controversy given that the Government was attempting to implement the tax on unrealised capital gains. 

Just prior to Christmas the Government released the Exposure Draft known as Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2025 which is effectively the re-write of the original Division 296.  While the Government succumbed to mounting pressure by removing the taxation on unrealised gains and now allowing for indexation of the threshold amounts, they introduced a two tiered system such that superannuation members with Total Superannuation Balances (TSB) between $3.0m and $10.0m will be subjected to an additional 15% tax while superannuation members with a TSB over $10.0m will be subjected to an additional tax of 25%.

Given that the legislation has just been released and the consultation period ends on the 16th January 2026 there could still be changes to the draft legislation.  We believe that if there are to be any changes they will arise from the consultation period as it now appears that the legislation will have sufficient support from the Greens and independents to pass through both houses of parliament.

In brief, the main points from the draft legislation are as follows:

The Objective

The objective behind the legislation is to reduce the concessional tax treatment of superannuation earnings for individuals with total superannuation balances that just before the start of an income year or at the end of an income year are greater than the large superannuation balance threshold for the year.

Large Superannuation Balance Threshold is defined to mean $3.0m in the 2026/2027 income year and the indexed amount in all subsequent years.  Note that it appears that the indexation will only take effect once the indexation would lead to an increase in the threshold of $150,000.  For example, if indexation was running at 3% per annum in the 2026/2027 income year then the $3.0m threshold would not be increased in the 2027/2028 income year as the indexation would only result in an increase of $90,000.  However, if inflation continued at 3% in the 2027/2028 income year) the threshold for the 2028/2029 income year would increase to $3.15m.

Very Large Superannuation Balance Threshold is defined to mean $10.0m in the 2026/2027 income year and the indexed amount in all subsequent years.  The Very Large Superannuation Balance Threshold will only increase via indexation in $0.50m amounts.

The additional tax rates for the two tiers will be:

a)  Large Superannuation Balance Threshold                  15%
b)  Very Large Superannuation Balance Threshold 25%

Taxable Superannuation Earnings

You have taxable superannuation earnings for an income year if your Total Superannuation Balance (TSB) just before the start of the income or at the end of the year is greater than the large (or very large) superannuation balance threshold for the year and the amount of your Total Superannuation Earnings for the year is greater than Nil.

First, we must calculate the applicable percentage.  This calculation is based on the formula:

• Your Total Superannuation Balance Reference Amount less Large (or Very Large) Superannuation Balance Threshold for the year

• Divided By, Your Total Superannuation Balance Reference Amount

• Multiply by 100 (to bring the amount to a percentage)

Note that “Your Total Superannuation Balance Reference Amount” is defined as being the greater of your TSB just before the start of the year and your TSB (if any) at the end of the year

Further, the percentage determined by the formula above is to be rounded to 2 decimal places.

Secondly, we must then calculate the Division 296 Fund Earnings which is calculated using the following:

• Relevant taxable income or loss

• Plus, Assessable Contributions

• Plus, Net Exempt Current Pension Income

• Plus, the entity’s non-arm’s length component for the year (if any)

• Plus, Pooled Superannuation Trust Component

Note that when including the “Net Exempt Current Pension Income” it is the total amount of the Fund’s exempt income reduced (but not below Nil) by the total deductions the entity could make if the exempt income were assessable.  For the majority of funds, this will broadly align with the Fund’s taxable income (i.e. the total of all assessable income less deductible expenses). Note further that this formula cannot produce a negative amount (i.e. a loss).  The last two components of the formula for most SMSFs will also not be relevant.

One modification that is important to SMSFs is the CGT Adjustments as set out in the proposed subdivision 296B of the Income Tax Assessment Act 1997.  For “small superannuation funds” (i.e. self managed superannuation funds with 6 or fewer members) the CGT amount to be taken into account in determining the Division 296 Fund Earnings will be the same CGT calculation when preparing the Fund’s annual income tax return unless

(i) A CGT event happens in relation to a CGT asset held by a small superannuation fund at a time during an income year; and
(ii) The fund held the asset at the end of 30 June 2026 and at all times on and from 1 July 2026 to immediately before that CGT event; and
(iii) The trustee of the Fund has made a choice for the purposes of Section 296-50(1) and is made in accordance with Section 296-50(2)

Pursuant to proposed section 296-50(2) a choice for the purposes of section 296-50(1):

(i) Must be in the approved form; and
(ii) Must apply to all CGT assets held by the Fund at the end of 30 June 2026; and
(iii) Can only be made during the period starting on the day this section commences and ending on the due date for lodging the Fund’s income tax return for the 2026/2027 income year; and
(iv) Cannot be revoked

Section 296-50(3) provides that where the choice is made to restate the cost bases of the Fund’s assets at 30 June 2026 you must restate the cost base of all CGT assets to market value at that date.  There is no discretion to cherry pick only those assets where there is an unrealised capital gain at 30 June 2026.  Rather, if the choice is made you are restating all CGT assets such that you get an uplift in cost base for assets with unrealised capital gains and you reduce the cost base of those assets with unrealised capital losses.  As this choice is irrevocable the choice must be made carefully. 

It is also important to point out that the above CGT Adjustment is purely for the purposes of subdivision 296.  When a Fund is determining its income tax position for the year it will calculate its taxable capital gains tax position as normal with its true cost base (or cost base being the asset’s market value at 30 June 2017 if the Fund elected to uplift the cost base of the asset to its market value at that point in time).

At the time of writing, the Exposure Draft does not clearly confirm whether the one-third CGT discount applies when calculating Division 296 Fund Earnings. When determining the taxable net capital gain of a Fund the Fund is entitled to a one- third CGT discount where the Fund has owned the asset for more than 12 months. 

When is the Tax Payable?

The Division 296 tax is payable by an individual within 84 days of the Commissioner of Taxation issuing a Division 296 Notice of Assessment.  To the extent that the amount assessed is paid after the due date for payment you will also be liable to pay General Interest Charges on the outstanding amount and the General Interest Charges are applied on a daily basis.  If you wanted to have the Division 296 assessment paid by the Fund you would have to complete a Release Authority and lodge this with the Commissioner of Taxation within 60 days of the Notice of Assessment being issued.

Other areas of interest under the proposed Division 296 legislation

• When calculating your Total Superannuation Balance for the purposes of the proposed Division 296 only take into account the net asset position of any Limited Recourse Borrowing Arrangements (LRBAs).  That is, do not gross up your interest by ignoring the liability.

• For taxpayers who exceed the “Very Large Superannuation Balance Threshold” and are subject to a 25% additional tax regime it will be important to assess the viability of retaining amounts above $10m within the superannuation environment.  This will be subject to what the exempt current pension income percentage is of the Fund and what the overall tax burden is to be.  There still may be asset protection and estate planning issues that override the tax implications and so a holistic approach to the position is needed (not a knee jerk reaction to the additional tax).

• For taxpayers who are below the $10.0m “Very Large Superannuation Balance Threshold” it is likely that it would remain viable to retain your superannuation interests.

• Many taxpayers with large superannuation balances have a significant “taxable – taxed element” which can potentially create a “death tax” of either 15% and 17% depending upon whether the benefits are to be paid to adult children directly from the Fund (17% tax on the taxable - taxed element)  or are to be paid to adult children after first transferring the money to the Estate and then onto the adult children (15% tax on the taxable – taxed element).  This may be an opportunity for those with total superannuation balances in excess of $10.0m to deal with a large part of this issue.

• Earnings are to be apportioned on a reasonable basis which means that segregation of assets will not assist in trying to minimise the impact of the proposed Division 296 tax.