Division 296: Higher Superannuation Tax - What’s coming, why it matters, and why now is the time to talk

Division 296: Higher Superannuation Tax

Following the introduction of the Division 296 Bill to Parliament on 11 February 2026, the framework for taxing higher superannuation balances is now largely clear ahead of its proposed commencement on 1 July 2026. Although the measure targets higher balances, the detail now available means trustees can, and should, model the impact and plan well before the start date, even where their fund may not be affected for several years.

Introduction

In February 2026, the Government introduced the long-anticipated Division 296 legislation into Parliament, formally progressing the proposal to impose additional tax on higher superannuation balances. The Bill follows the Exposure Draft released in December 2025, which was subject to consultation and significant feedback from professional bodies and advisers.

Despite that consultation process, the legislation as introduced into Parliament reflects very few substantive changes from the original Exposure Draft. As a result, this article proceeds on the basis that the framework is likely to be enacted substantially in its current form.

While Division 296 is often described as a measure affecting “very large” balances, our strong view is that all trustees should be thinking about it now, even if their fund is not currently impacted and may not be for many years.

How we got here

The idea of taxing higher superannuation balances at an increased rate is not new. It was first announced almost three years ago, with a proposal to impose an additional tax on earnings where a member’s total superannuation balance exceeded $3 million.

That original proposal was controversial. Two elements in particular caused concern across the profession: the taxation of unrealised gains and the absence of indexation of the $3 million threshold. Ultimately, the legislation failed to pass both Houses of Parliament and lapsed on the eve of the most recent Federal Election.

Following that failure, the Government indicated that a revised version would be introduced and the controversial aspects addressed, i.e. unrealised gains would be removed from the calculation and indexation would be incorporated.  It was also announced that a new $10 million threshold with a higher tax rate would be introduced.  A new start date of 1 July 2026 was announced.

The legislation introduced into Parliament recently largely aligns with the core policy intent and the October 2025 announced changes.

What Division 296 actually does

Division 296 introduces additional tax on a member’s superannuation earnings once certain balance thresholds are exceeded.

Under the exposure draft, there are two key thresholds:

• Where a member’s total superannuation balance exceeds $3 million, an additional 15% tax applies to the proportion of earnings attributable to the balance above that threshold.
• Where a member’s balance exceeds $10 million, a further 10% applies, resulting in a total additional tax of 25% on the proportion of earnings attributable to balances above $10 million.

In practical terms, this means affected earnings may be taxed at:

• 30% where balances exceed $3 million but are below $10 million, and 
• up to 40% on the portion of earnings attributable to balances above $10 million.

Importantly, this does not apply to the whole fund’s income, only to the proportion that relates to the amount above the relevant threshold.

The $3 million and $10 million thresholds are proposed to be indexed, with indexation occurring in $150k and $500k increments respectively on the initial caps. While helpful in theory, indexation is unlikely to materially delay the point at which Division 296 becomes relevant for many members.

How the tax is calculated (at a high level)

The calculation itself is technical and formula‑driven. Broadly, it seeks to identify a member’s total superannuation earnings for the year and then apply a proportion based on how much of their balance exceeds each relevant threshold.

One important nuance is the difference between the first year of application and later years. In the first year, the calculation is based solely on the member’s balance at year end. In subsequent years, the calculation references the higher of the opening or closing balance, which can produce outcomes that are not always intuitive.

Another practical issue is that total superannuation earnings are expected to be determined using an actuarial calculation. While we are still waiting on final regulations to confirm the precise methodology, it is clear this will introduce additional administration, complexity and cost for affected funds.

Example: Member with balance above $3 million but below $10 million

Andy has a total superannuation balance of $4 million at 30 June 2027 and his superannuation earnings for the year were $400,000. The relevant threshold is $3 million.

In Andy’s case, $1 million of his balance sits above the $3 million threshold. That means 25% of his total balance ($1 million ÷ $4 million) exceeds the threshold.

Division 296 does not apply to all of Andy’s earnings. Instead, it applies only to the proportion attributable to the excess balance.

Therefore:

• 25% of Andy’s $400,000 earnings = $100,000
• An additional 15% tax applies to that portion of the earnings
• Division 296 tax payable = $15,000

The remaining earnings continue to be taxed at the standard superannuation rate of 15% (or 0% for those members in receipt of a Retirement Phase Income Stream).

Sometimes the right answer is to do nothing

One of the most important things to understand is that Division 296 does not automatically mean funds should be removed from the superannuation environment.

Even where part of a fund’s income is taxed at 30% or 40%, superannuation may still be the most tax‑effective place to hold wealth when you consider the broader picture, including income tax, capital gains tax, estate planning outcomes, asset protection and administrative simplicity.

In many cases, a careful analysis may support a deliberate decision to do nothing at all.

The once‑only CGT reset

The exposure draft includes a once‑only option to reset asset values to market value at 30 June 2026 for Division 296 purposes. This will feel familiar to those who experienced the 2017 transfer balance cap changes, except for one very important difference – where a fund elects to opt into the CGT reset, the reset applied to all fund assets with no ability to ‘cherry pick’.

While many funds are likely to opt into the reset, it is not automatic. Resetting can lock in losses for Division 296 purposes, which may be undesirable where assets are currently below their original cost. In those cases, trustees may instead consider realising losses before 30 June 2026, while being mindful of wash‑sale rules if the proceeds on sale are reinvested.

It is important to note that this reset applies only for Division 296 calculations.  There is no adjustment to the actual CGT cost base for income tax purposes.

Balance equalisation

Division 296 adds further weight to the long‑standing strategy of equalising superannuation balances between spouses, where appropriate.

Even funds well below the $3 million threshold today should be thinking about this. Without planning, it is common for one spouse’s balance to grow far more quickly than the other’s, creating avoidable Division 296 exposure later.

Estate planning considerations

Division 296 applies in the year of death, making estate planning a central consideration rather than an afterthought. This is particularly important where reversionary pensions are involved, as transferring large pension balances to a surviving spouse can quickly push them over the Division 296 thresholds.

Where a member holds multiple super interests, there is scope to manage outcomes by ensuring any Division 296 tax is paid from the interest with the largest taxable component, improving after-tax results for beneficiaries.

For some families, Division 296 may also prompt earlier wealth transfers. In certain cases, members may choose to withdraw funds and provide family members with an early inheritance, rather than leaving larger balances exposed to higher tax rates. Where this involves re-contributions to super for children or other family members, care is required, as multi-generational funds can introduce administrative, investment and governance complexities.

As with all Division 296 strategies, the right approach will depend on individual circumstances and should be considered well ahead of commencement.

Timing flexibility and withdrawals

Where reducing a member’s balance forms part of the strategy, there is some flexibility. A member who exceeds $3 million at 30 June 2026 but is below that threshold at 30 June 2027 will not be impacted in the first year.

Trustees effectively have until 30 June 2027 to implement withdrawals before Division 296 applies on an ongoing basis where either the opening or closing balance exceeds the relevant threshold.

Remaining Uncertainty

Although the Bill has now been introduced into Parliament, a number of technical and policy concerns remain under active discussion within the profession:

• Administrative complexity and cost - The formula‑driven methodology and expected reliance on actuarial‑style calculations may increase compliance workloads and professional fees for affected funds, particularly SMSFs.
• Transitional and CGT reset mechanics - The interaction between the once‑only CGT reset, unrealised losses, pending transactions, and broader fund strategy continues to present practical questions for trustees.
• Treatment of franking credits and tax offsets - Uncertainty remains regarding how earnings will be defined for Division 296 purposes, especially whether franking credits and other tax offsets will appropriately reduce assessable Division 296 earnings.
• Balance fluctuations and fairness - Using the higher of opening or closing balances in later years may produce outcomes where tax is triggered despite significant mid‑year market declines, raising fairness concerns.
• Outstanding regulatory detail - Certain valuation rules, reporting mechanics and technical definitions are still expected to be clarified through regulations or legislative instruments, leaving some planning assumptions provisional.

The bottom line

Division 296 is highly technical and interacts with almost every aspect of superannuation planning - investment strategy, pension structuring, contribution planning and estate planning.

There is no one‑size‑fits‑all solution. Even where the outcome is ultimately to do nothing, that decision should be made consciously and with a clear understanding of the implications.

We recommend all trustees review their position early and seek advice tailored to their fund.