Division 296: Superannuation Tax Reform in Limbo

Although the proposed start date of 1 July 2025 has now passed, Division 296, Australia’s plan to impose up to an additional 15% tax on superannuation balances over $3 million, is still not law.

The legislation remains in limbo, having lapsed before the last federal election and having not yet been reintroduced. The government’s silence on the issue is telling, and for a reform of this scale, the lack of clarity is creating growing unease across the industry.

Where Things Stand

Division 296 was introduced and passed in the House of Representatives in 2023, but it stalled in the Senate due to lack of support from cross benchers. It ultimately lapsed at the end of the previous Parliament and has not since been re-introduced.  While the re-elected Labor government has signalled its intention to bring the measure back, as of October 2025, it remains a proposal - not law.

Despite this, Division 296 continues to feature in budget forecasts, and the government is expected to reintroduce it, potentially with amendments. The first balance test is expected to be 30 June 2026, with assessments to follow in the 2026–27 financial year, although this timeline is increasingly uncertain.

Member Sentiment: Acceptance with Reservations

From conversations with clients and industry peers, it is evident that many members with balances above the threshold are coming to terms with the idea of paying more tax. In principle, there is a growing acceptance that a portion of their fund earnings will be taxed at up to 30%. It is not ideal, but it is not unexpected either, especially in the context of broader fiscal pressures and equity debates.

The major reservation expressed by industry experts is the inclusion of unrealised gains in the calculation of a Division 296 liability. This is where the policy starts to feel less like a tax reform and more like a disruption.

Unrealised Gains: The Core Concern

Taxing unrealised gains, before assets are realised for cash, goes against the grain of Australia’s traditional tax principles. It introduces liquidity risks, valuation concerns, and general uncertainty. For many funds, this is not just a tax issue, it is a fundamental one which could significantly impact the role of their super fund in their wider investment group or at least the style of investments held by their fund.

Our current view is we expect this part of the proposal to be scrapped or significantly scaled back. The more time that passes without clarity, the more confident we become that the government will walk back, defer or modify this component. Why? Because the alternative is chaos.

Imagine the market disruption if this proceeds in its current form, with minimal time for funds and members to plan. We could see mass asset sales, rushed restructures, and a wave of unintended consequences all in the name of taxing gains that have not even been realised.

The Greens’ Proposal: Lowering the Threshold

Compounding concerns, the Australian Greens have proposed lowering the threshold to $2 million (unindexed), which would dramatically expand the scope of Division 296. While the intent is to improve equity and raise revenue, the practical implications are significant. More Australians, especially younger members, would be caught in the net, and the concerns around unrealised gains would only intensify.

The Non-Indexed Threshold: A Quiet Expansion

Another issue that is causing much concern is the fact that the $3 million threshold is not indexed. This means that over time, as super balances grow naturally through contributions and investment returns, more and more members will be impacted, even if they are not considered “high balance” today.

This silent expansion of the tax’s reach could have long-term consequences for retirement planning and fund strategy. It is a classic case of bracket creep, and without indexation, Division 296 risks becoming a tax not just on the wealthy, but on anyone who’s contributed into super diligently over their career.

Strategic Planning: Sometimes Doing Nothing Is the Best Strategy

As we help clients navigate this uncertainty, one important message is emerging: sometimes, doing nothing may be the best strategy.

If the legislation passes in its current form, and the maximum tax rate on earnings is 30%, that may still be an appropriate outcome, especially when compared to what could be achieved outside of superannuation. For many, the super environment remains one of the most tax-effective vehicles available, even with the additional tax.

It is also worth emphasising that there is still time to make changes if needed. The relevant assessment point is 30 June 2026, so if a withdrawal or restructure proves to be the best option, it may not be too late. However, acting now, based on legislation that has lapsed and may be subject to significant change, could be a costly mistake. Getting money back into superannuation is extraordinarily difficult, particularly for high-balance members, and premature action could permanently reduce retirement flexibility and tax efficiency.

What Now

With the clock ticking toward 30 June 2026, the industry is in a holding pattern. We are advising clients to stay informed, but not to panic. There’s still time, and there is still hope that the most problematic aspects of Division 296, particularly the taxation of unrealised gains, will be reconsidered.

The next opportunity for Parliament to consider Division 296 legislation is when sitting resumes in late October. Hopefully providing clarity on Division 296 will be a priority for the government at that time.

In the meantime, we will continue to monitor developments, advocate for sensible reform, and help members prepare for whatever version of Division 296 ultimately lands.

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