Division 296 Update: What’s Changed and What It Means for Your Super Background on Division 296   

Division 296 was first introduced in 2023 as part of the Government’s Better Targeted Superannuation Concessions policy.

The original proposal aimed to apply an additional 15% tax on the earnings attributed to the portion of an individual’s Total Superannuation Balance (TSB) exceeding $3 million. 

Under that design, earnings included both realised and unrealised gains, meaning members could be taxed on increases in the value of assets (for example a property held in an SMSF), even if those assets were not sold.

This drew strong criticism from the superannuation industry, tax professionals, and investors, especially for those holding illiquid assets such as property, private equity, or unlisted investments. 
Although the Government maintained that fewer than 0.5% of Australians would be affected, concerns mounted around valuation challenges, liquidity risks, and the precedent of taxing unrealised gains.

A Redesign of Division 296

In response to significant industry feedback, the Treasurer has announced a major redesign of Division 296 with the key change being that the Government has abandoned the plan to tax unrealised gains. Under the new proposal only realised earnings (interest, dividends, rent, and realised capital gains) will now be included under the additional tax for those with TSB over $3 million.  

This is a substantial win for super fund members and advisers alike, reducing compliance complexity and removing the risk of having to sell assets solely to fund a tax bill. 

What’s Changed

The updated proposal includes four major reforms: 

1. A Two-Tier Threshold Approach with different rates applying to balances above $3 million and $10 million. 
2. Thresholds will now move with inflation, indexed to the Consumer Price Index (CPI). 
3. Removing the inclusion of unrealised capital gains from the tax base. 
4. The start date has been deferred from 1 July 2025 to 1 July 2026, giving Treasury and superfunds more time to prepare. 

There will also be a consultation period to consider: 

• How realised earnings are defined and calculated; 
• Whether exemptions should be extended for some judges; and 
• How to ensure fair treatment for defined benefit members. 

What Hasn’t Changed

Despite the positive updates, the core framework of Division 296 remains: 

1. The objective to maintain superannuation’s concessional treatment while ensuring sustainability is unchanged.  
2. The tax will still be levied on the individual, payable either from superannuation or personal funds. 
3. A member’s Total Superannuation Balance (TSB) remains the key measure for determining liability. 
4. Losses can be carried forward and offset against future years’ earnings. 

The Two-Tier Threshold System

The new two-tier structure introduces progressive tax rates on superannuation earnings:

Tier	TSB Range	Effective Tax Rate on Earnings above threshold	Explanation
Tier 1	$3 million – $10 million	30%	Standard 15% rate + 15% Division 296 tax
Tier 2	Above $10 million	40%	15% + 15% (Tier 1) + additional 10%

Both thresholds will be indexed annually to CPI to prevent “bracket creep”: 

• $3 million threshold: indexed in $150,000 increments 
• $10 million threshold: indexed in $500,000 increments 

This alignment with the Transfer Balance Cap (TBC) ensures the measure remains proportionate over time.

Earnings Based on Realised Gains

Under the revised design, only realised income and capital gains will be taxed. This is a major departure from the earlier proposal. 

For SMSFs, realised earnings will be reported through the SMSF Annual Return, with each member attributed a fair and reasonable share of the fund’s taxable income. For large APRA-regulated funds, system enhancements will be required to track and report realised gains and income at the member level. 

While this creates additional reporting work for larger funds, it brings the measure in line with existing tax concepts and reduces the risk of double taxation or unfair liabilities.

Implementation Timeline

The start date has been deferred to 1 July 2026, allowing more time for consultation and system updates. Total Superannuation Balances will be assessed as at 30 June 2027, meaning the first assessments will be issued in the 2027–28 financial year.

Key Challenges

While the direction of reform is broadly welcomed, a few areas still need clarity and refinement: 

• Reporting complexity for large funds needing to allocate realised earnings per member. 
• Impact of higher-tier tax for members with balances exceeding $10 million. 
• Legislative detail, which will continue to evolve through the consultation process. 

Key Takeaways 

1. Commencement delayed until 1 July 2026, with first assessments expected in 2027–28. 
2. Only realised earnings will be taxed. 
3. Two-tier structure introduced: 
   • $3m-$10m – effective 30% tax
   • $10m+ – effective 40% tax
4. Thresholds indexed to CPI. $150k increments for the $3m tier; $500k increments for the $10m tier. 

The latest Division 296 redesign reflects a more practical and balanced approach to targeting superannuation concessions. 

While the changes will impact a very small portion of Australians, they highlight the importance of proactive superannuation planning, particularly for those approaching or exceeding the thresholds. It is important to note that these changes have yet to be passed.

If you’d like to understand how these updates might affect your position, or how best to prepare before 1 July 2026, speak with your advisor or contact our team to discuss strategies.