On 10 March 2026, the Bill to legislate Division 296 tax passed both Houses of Parliament and will start on 1 July 2026.

What is Division 296 tax?

Division 296 tax is an additional tax levied on a portion of taxable super earnings of individuals whose total super balance (TSB) is above the large super balance threshold set at $3m.

The tax is assessed to the individual and is separate from personal income tax. The individual may pay the tax personally or request the super fund release the amount.

Over the last year, there has been considerable speculation about how far the Federal Government might go with Division 296. Therefore, it is essential to note that the most recent measure, which has been watered down, passed with significant changes from the original draft legislation. The revised and passed version is as follows…

addition of a very large super balance threshold ($10m)
25% tax rate for the portion of taxable super earnings relating to the amount of the individual’s TSB exceeding the $10m
indexation of the large and very large super balance thresholds
additional TSB testing date
removal of taxing unrealised capital gains, and
changes to when this tax is applied to death benefits.

Note: Large super balance thresholds…
The $3m and $10m large super balance thresholds will be indexed in line with the consumer price index in $150,000 and $500,000 increments respectively. An individual’s TSB, which is calculated each 30 June, is measured against the large super balance thresholds. The amount of taxable super earnings subject to Division 296 tax is based on the percentage of the person’s TSB that exceeds the large balance thresholds.

When is Division 296 tax payable?
Division 296 tax will apply to a portion of taxable super earnings relating to the balance exceeding $3m, if the individual’s TSB is more than the large super balance threshold ($3m) at the start of the income year (prior 30 June) or at the end of the income year (end 30 June).

This means withdrawals to reduce a TSB below the $3m large balance threshold during the income year can still result in a Division 296 tax liability.

Transitional rule…
Transitional provisions apply in the 2026/27 income year. For this income year, Division 296 tax will be determined solely by the individual’s TSB at 30 June 2027. This means members will have until 30 June 2027 to make any recommended changes to their retirement strategy.

Death…
Upon death, an individual will have a nil TSB. This means where the individual passes away:

in 2026/27, no Division 296 tax liability can arise, as TSB is nil at the end of the year
from 2027/28 income year, Division 296 tax will apply if TSB exceeds the large super balance threshold either on 30 June prior or at the end of the income year; where Division 296 tax will be payable by their estate, and
no Division 296 tax will apply to the deceased in the year after death, even if their death benefit proceeds have not been paid.

Total super earnings…
An individual’s total super earnings are their attributed share of fund earnings from each super interest they hold. Certain Judges’ pension and constitutionally protected fund earnings are excluded. Unrealised capital gains will not be taxed and adjustments will be applied to remove capital gains accrued prior to 1 July 2026. A formula will apply to determine taxable super earnings for defined benefit members. A super fund can elect to adjust the CGT cost base of its assets for Div 296 purposes (only). The original cost base will continue to apply for determining income of the fund for ordinary tax purposes.

Tip…
SMSF trustees can revalue their fund assets on 30 June 2026, record the adjusted cost base (for Division 296 purposes only) and opt-in using the approved form by the due date of their 2026/27 annual tax return. For Division 296 purposes, capital gains accrued on fund assets prior to 30 June 2026 will be excluded from taxable super earnings. As the opt-in is at the fund level, the cost bases of all fund assets will be adjusted when the fund makes an election. SMSFs without ‘in-scope’ members may also consider making this election for Division 296 purposes, as their members may become in-scope members in the future.

Division 296 tax rates…
Taxable super earnings will be taxed at the following rates:

Member’s taxable super earnings attributed to: Division 296 tax rate

Balance up to the large super balance ($3 million in 2026/27) Nil

Above the large super balance ($3m in 2026/27) 15%

Above the very large super balance ($10m in 2026/27) +10% (ie total 25%)

Calculating Division 296 tax payable…
The following formula is applied to calculate Division 296 tax:

(% of TSB reference amount X above large super balance ($3m in 2026/27) X taxable super earnings x 15%)
plus
(% of TSB reference amount X above very large super balance ($10m in 2026/27) x taxable super earnings x 10%)

Example
Emily has a TSB of $15 million at the end of the 2026/27 income year. That year, she is attributed with $800,000 of taxable super earnings for Division 296 tax purposes.
Step 1 - Work out % of TSB above the large super balance threshold ($3m in 2026/27)
($15m – $3m) / $15m x 100 (rounded to 2 decimal places) = 80%
Step 2 - Work out % of TSB above the very large balance threshold ($10m in 2026/27)
($15m - $10m) / $15m x 100 (rounded to 2 decimal places) = 33.33%

The formula to determine Emily’s Division 296 tax payable is:
= [(80% x earnings x large balance tax rate) + (33.33% x earnings x very large balance tax rate)]
= (80% x $800,000 x 15%) + (33.33% x $800,000 x 10%)
= $96,000 + $26,664
= $122,664

Please note, these are early days, and there may be more changes within the May Federal Budget (we’ll see).

We’ll keep clients informed of any changes as we move forward.

Rick Maggi CFP, Financial Advisor (Perth), Westmount Financial