Understanding Div 296 | How will the new $3mil super tax work
Division 296 tax legislation is now law. It was passed by the senate on the 10th March 2025 and is awaiting royal assent before officially becoming law which in reality is just a formality. This tax is often referred to as the “$3 million super tax,” this new rule affects SMSF members with more than $3 million in superannuation savings.
The government has just released draft regulations, which will clarify how Division 296 operates and may refine our understanding of its implementation.
SMSF members with super balances exceeding $3million
The Div 296 tax only affects members whose total superannuation balance (TSB) exceeds $3 million. There are now two thresholds that Div 296 tax is based on: the familiar $3 million threshold, the large balance threshold and a second at $10 million being the very large balance threshold.
It is worth noting that both thresholds are indexed, so they will change over time according to indexation.
When does this measure start?
The new Div 296 tax is effective from 1st July 2026 (2026/27 financial year).
Who will this measure apply to in the first year?
An in-scope Individual with a total superannuation balance (TSB) of more than $3million at 30th June 2027. This is a one-off transitional rule. An in-scope individual was termed by the ATO as a person who is subject to Div 296 tax.
Who will this measure apply to after the first year?
In-scope individuals who have a TSB of more than $3million which is measured at:
- the beginning of a financial year, 1st of July, or
- at the end of a financial year, 30th June
whichever is the highest being the “TSB reference amount” (TSBRA).
How is a member’s total superannuation balance (TSB) calculated?
A member’s TSB is the total of all of a member’s super across all of their super funds which may include self-managed super funds (SMSFs), retail super funds, industry super funds, defined benefits funds i.e. public service funds.
Your TSB is measured at the end of the financial year at 30th June and includes the sum of accumulation and pension interests which includes:
- accumulation balances at 30th June
- the balance of your account-based pension (ABP) or your market linked pension (MLP) at 30th June reported in your member statement
- the transfer balance cap (TBC) adjusted for commutations, is the value reported for defined benefit pensions which include complying lifetime pensions or complying life expectancy pensions
- transition to retirement pension (TRIS) balance reported at 30th June
- defined benefit interest in accumulation stage may not be the balance of your account, special valuation rules will apply
- rollover benefits in transit
- Less structured settlement contributions or personal injury contributions
Update – the regulations may change how defined benefit interests for retirement and accumulation phases are valued. Note also that certain outstanding balances in relation to a LRBA are counted towards a member’s TSB. However, it is disregarded for the purposes of Div 296 tax.
How is Div 296 tax calculated?
Div 296 tax has two tax rates.
- Additional tax of 15% is assessed on super fund earnings on the proportion of a member’s TSB which exceeds $3million.
- Additional tax of 10% is assessed on super fund earnings on the proportion of a member’s TSB which exceeds $10million.
Example – Tax calculated on proportion of TSB
Mary has a TSBRA of $12 million on 30th June 2027. Her Div 296 fund earnings were determined to be $750,000.
- Proportion of TSB exceeding $3mil = ($12mil-$3mil)/$12mil = 75%
- Proportion of TSB exceeding $10mil = ($12mil-$10mil)/$12mil = 17%
Tax calculation
$750,000 x 15% x 75% = $84,375
Add $750,000 x 10% x 17% = $12,750
Total Div 296 tax is $84,375 + $12,750 = $97,125
Are the Div 296 thresholds indexed?
Yes, they are. Both thresholds are indexed to CPI with the $3mil threshold going up in increments of $150,000 and the $10mil threshold going up with increments of $500,000. The CPI is based on the December quarter prior to the relevant year for the All-Groups CPI which is the weighted average of the 8 capital cities.
Who is not subject to Div 296 tax?
A very limited number of members are not subject to Div 296 tax and include:
- A child receiving a death benefit pension – most adult children are excluded from receiving a death benefit pension, so this category is already limited to children who are disabled, under 18 or between 18 and 25 and financially dependent on the deceased member. Unless the child is disabled the pension must be cashed out when they turn 25.
- An individual who received a structured settlement contribution which was at least partly contributed to super, and they elected not to have it count towards their non-concessional contribution cap – the exemption is from the year the contribution is made and for all future years regardless of the size of the contribution made or whether it remains in super.
- Members who die on or after 1 July 2027 are deemed to have a TSB of nil at their date of death and onwards resulting in nil Div 296 tax liability for future years – however they may be subject to Div 296 tax in the year of death if they have a TSB exceeding $3mil at the beginning of the year. Members who die during 2026/27 will not be liable to Div 296 tax as they are deemed to have nil TSB at 30th June 2027 and the special on-off rule only measures TSB at 30th June 2027.
Example – Fred does not have a Div 296 tax liability
Fred has an SMSF and he dies on 20th March 2028. His TSB is $2.8 mil on 1st July 2027. The death benefit was not paid out by the 30th June 2028 and his TSB at that time is $3.1mil.
Fred’s TSB at 30th June 2028 is deemed to be nil. As his opening balance was under $3mil and his closing TSB was deemed to be $nil no Div 296 tax arises for the 2027/28 year or future years.
Update – Based on draft regulations an in-scope deceased member (with an opening year balance over $3 mil) may be liable to Div 296 tax. The final assessment for the member’s year of death will factor in earnings for the year of death and those accrued until death benefits are fully paid. This measure ensures super earnings capture asset sales after death relating to growth before death. Example below taken from the Treasury’s Exposure draft explanatory material
Example 14: Relevant superannuation earnings in relation to a superannuation interest of a deceased individual, with benefits distributed from the interest in a year after death
Tim and Dawn are members of an SMSF with accumulation interests worth a total of $8 million on 30 June 2028. Neither of them has any other superannuation interests. An actuary has certified that the share of the total funds is distributed evenly between Tim (50 per cent) and Dawn (50 per cent) such that their respective TSBs are valued at $4 million. As Tim and Dawn’s respective TSBs at the end of the 2027-28 income year are greater than the large superannuation balance threshold of $3 million, they are both in-scope for Division 296 tax.
On 23 June 2029, Dawn passes away. Dawn’s TSB upon that date is subsequently taken to be nil (see section 296-50 of the Amending Act). However, Dawn’s interest is composed of several different assets which take time to be sold in order to pay out the superannuation death benefits related to this interest. The fund sells a number of assets and her interest in the SMSF is fully distributed on 12 September 2029. As Dawn’s superannuation interest had not been fully distributed as a superannuation death benefit until the following income year after her death, this means that to work out Dawn’s relevant superannuation earnings for Division 296 purposes and her Division 296 tax liability for the 2028-29 income year, her earnings must also take into account earnings of her interest in the 2029-30 income year up and until the interest is paid out.
In the 2028-29 income year the SMSF had Division 296 fund earnings of $500,000 for the fund year. An actuary certified that the amount attributable to Dawn’s interest for was $250,000. Her interest was valued at $4.25 million on 30 June 2029. In the 2029-30 income year, the SMSF had Division 296 fund earnings of $1 million for the fund year (in part due to the sale of several assets to pay out her death benefit). An actuary certified that the amount attributable to Dawn’s interest was $162,848. The actuary determined her interest in the fund was valued at $4.25 million for 20 per cent of the year, and then $0 for the remaining part of the year as a result of her interest being paid out as a superannuation death benefit, giving an average value of $850,000. Dawn’s total superannuation earnings for 2028-29 (the year she died) is $412,848. This is the sum of the relevant superannuation earnings attributed to her interest in the 2028-29 and 2029-30 fund income years.
Is any superannuation interest excluded from Div 296 tax?
There are rare circumstances when earnings from a superannuation interest are excluded from being counted as Div 296 super earnings. An individual with an excluded super interest can still be subject to Div 296 tax but the total super earnings are reduced by the excluded earnings. The super interest is still counted as part of the member’s TSB.
Excluded super interests include a superannuation interest in:
- a constitutionally protected fund (CPF) – this type of fund is an untaxed fund and is not liable for tax on contributions or earnings – some state governments operate CPFs on behalf of their employees such as Super SA Triple S Fund, West State Super and Gold State Super in Western Australia
- the regulations may prescribe a superannuation interest which is an excluded interest
- a super fund established under the Judges Pensions Act 1968 – such as a current or former Justice of the High Court
- an equivalent fund for a current or former Justice of the Supreme Court of the Australian Capital Territory or the Northern Territory
- a reversionary or retirement phase income stream paid from the excluded interest on the death of any of the above
- a non-complying super fund – including a reversionary pension beneficiary
Example – Subject to Div 296 tax
Sandra’s super interest at 30th June 2027 included:
- $850,000 in the Super SA Triple S Fund – an excluded super interest – reported super earnings of $40,000
- $2.9mil in her SMSF – reported super earnings of $116,000
Sandra is subject to Div 296 tax as her TSB was $3,750,000 at 30th June 2027 which exceeded the $3mil threshold.
Div 296 tax calculation excludes super earnings of $40,000 but the $116,000 from her SMSF was included and taxed:
15% x (($3,750,000-$3,000,000)/ $3,750,000) x $116,000 = 15% x 20% x $116,000 = $3,480
What are included in Div 296 super earnings?
The following are included in calculating Div 296 super earnings:
- SMSF taxable income or loss
- Less – Assessable Contributions
- Add – exempt current pension income (ECPI) – less expenses not tax deductible due to the application of ECPI
- Add -non-arm’s length income (NALI)
- Less – ordinary taxable capital gains
- Add – adjusted taxable capital gains
- Add – Pooled Superannuation Trust (PST) earnings
Div 296 super earnings cannot be negative but future Div 296 earnings can be reduced by a carried forward tax loss.
Example – Add back ECPI income and expenses
Nicky’s SMSF is in 100% pension phase as all of the fund assets are used to pay retirement phase pensions. Rental income of $50,000 was received in the 2027/28 year. No other income was received and $5,000 of rental expenses were incurred.
The fund’s taxable income was $nil. The $5,000 could not be claimed as the expenses related to incurring exempt income. The $50,000 is not assessable income for tax purposes.
The fund’s Div 296 super earnings are calculated as follows:
Fund taxable income Nil
Add: ECPI $50,000
Less: Rental Expenses (5,000)
Div 296 super earnings $45,000
Hint –Defined benefit interests will calculate earnings differently.
Adjusted capital gains for Div 296 purposes
Adjusted capital gains for SMSFs will be calculated similar to taxable gains for tax purposes but a cost base adjustment disregarding the build-up of unrealised capital gains held at 30th June 2026 is available provided the fund opts-in by the due date for lodging their 2026/27 annual return. This adjustment is only for Div 296 capital gains calculations and not part of the fund’s cost base for CGT purposes. The adjustment is available for assets held directly by an SMSF and thus the unrealised capital gains held indirectly via a unit trust or a company are not disregarded.
An SMSF either opts-in or not. By opting in there is no selection of assets or disregarding assets with a notional capital loss. All assets held at 30th June 2026 have their cost base adjusted to the market value at that time. There is no CGT event to trigger capital gains tax, and the acquisition date will not change.
For tax purposes the capital gains and losses are disregarded (not included as income in the fund’s annual return) when a fund has segregated pension assets. One of the most common scenarios is a fund in 100% pension mode which is deemed to be fully segregated. For Div 296 purposes capital gains and losses are not disregarded and form part of the super fund earnings.
Example – adjusted cost base
Martha’s SMSF owned one asset:
- A property purchased in 2020 with a cost base of $450,000 – the market value was $600,000 at 30th June 2026
For Div 296 purposes Martha’s SMSF opted-in to adjusting the fund’s cost base for all of its assets owned at 30th June 2026.
The property was sold on 10 January 2028 for $1,000,000. There were no carried forward capital losses.
| Tax calculation CGT purposes | Div 296 calculation |
| Capital gain $1mil – $450,000 = $550,000 | Capital gain $1mil – $600,000 = $400,000 |
| Less 1/3 discount $550,000/3 = ($183,333) | Less 1/3 discount $400,000/3 = ($133,333) |
| Net taxable capital gain $366,667 | Net capital gain Div 296 $266,667 |
Note that unrealised capital gains are not included in Div 296 super earnings. Deferred notional capital gains resulting from the 2017 reforms when the transfer balance cap was introduced are included for tax purposes but not for Div 296 purposes.
How are carry forward capital losses dealt with?
The general principle of capital losses being carried forward when a capital gain is insufficient to absorb the loss is the same for Div 296 earnings calculations. A capital loss cannot offset other fund earnings. It can only offset a capital gain or otherwise be carried forward and offset a capital gain in the future.
Carrying forward capital losses when an SMSF opts-in to the cost base adjustment operates a little differently. Additional net capital losses arising from the cost base adjustment provisions cannot be carried forward.
Example – loss of Div 296 capital loss
Craig’s SMSF purchased a property in 2022 with a cost base of $800,000 and a market value at 30th June 2026 of $1,200,000. It was sold on the 10 July 2027 for $1,000,000 as the market had slowed after it peaked in 2026. There are no carried forward capital losses. The SMSF opted in for Div 296 adjusted cost base.
Tax calculation
| Capital gain/(loss) $1,000,000 – $800,000 | = $200,000 |
| Less 1/3 discount $200,000/3 | = ($66,667) |
| Net taxable capital gain | $133,333 |
Div 296 calculation
| Capital gain/(loss) $1,000,000-$1,200,000 | = ($200,000) |
| Net taxable gain for Div 296 | Nil |
The modified net capital loss of ($200,000) is lost as there are no other capital gains and it cannot be carried forward.
Example – carried forward capital losses
Merrill’s SMSF has carried forward capital losses of $1million at 1 July 2027. The fund sold a property it purchased on 20th May 2024 with a cost base of $750,000 for $1,250,000 on 4th August 2027. The SMSF opted in for Div 296 cost base adjustment. The market value at 30th June 2026 was $1,300,000.
Tax calculation
| Capital gain/(loss) $1,250,000 – $750,000 | = $500,000 |
| Less: c/frwd capital losses | ($500,000) |
| Net capital gain | Nil |
| Carried forward capital loss $1,000,000- $500,000 | = $500,000 |
Div 296 calculation
| Capital gain/(loss) $1,250,000-$1,300,000 | = ($50,000) |
| Net taxable gain for Div 296 | Nil |
The fund did not have any other capital gains to offset the Div 296 capital loss of $50,000 so it cannot be carried forward. However, the $500,000 carried forward capital losses for tax purposes can reduce future capital gains which in turn reduces the fund’s Div 296 fund earnings in the year the capital loss can be utilised.
How will fund earnings be attributed to in-scope members?
The final regulations will provide further clarity on the mechanism to allocate Div 296 super earnings to in-scope SMSF members. Most SMSF members are familiar with earnings being distributed on a fair and reasonable basis – according to past Treasury statements the attribution of super earnings for Div 296 purposes will apply a general rule using a special actuarial certificate, similar to the proportionate method in relation to calculating exempt pension income (ECPI). It is expected that all SMSFs will have to apply the general rule as a common attribution method even if an in-scope member has specific segregated assets. A TSB value formula approach may be used for some funds where the general rule is unable to be applied.
Can I reduce my Div 296 tax?
The Div 296 tax is a separate tax to a member’s personal tax and a member cannot offset personal tax losses, use franking credits or tax deductions to reduce Div 296 tax.
However, there are some strategies to reduce a member’s TSB which can result in reducing Div 296 tax or possibly keeping the TSB below the $3mil threshold:
- Evening up member balances between spouses using contribution splitting or withdrawal and recontribution strategy
- Withdrawing super before 30th June
- Allocating large contributions in July rather than June where your TSB is getting close to $3mil
Please seek advice in relation to the above strategies from your superannuation specialist and licensed financial adviser to ensure it is right for your personal circumstances.
Asset Valuations
The new Div 296 provisions highlight the need for an SMSF to obtain reliable evidence of property valuations and valuations of private companies and unit trusts and other assets such as paintings, vintage cars and coin collections. The valuation of fund assets at 30 June can be the difference between being caught under Div 296 or not. SMSF auditors are already gearing up to look for dodgy valuations.
Key Takeaways
- Division 296 tax is law after royal assent is received (just a formality) -it has passed both the House of Representatives and the Senate
- Div 296 tax draft regulations have only just been released and thus some of the above may be modified after the regulations have been finalised, but any changes are not expected to be significant
- The legislation is effective from 1st July 2026
- Div 296 tax is intended to be levied on members of SMSFs with TSB in excess of $3million
- Div 296 tax is not levied on the fund, but a member is able to have the tax released from their member benefits
- Only a proportion of a member’s super earnings will be subject to Div 296 tax
- Div 296 tax is applied to in-scope individuals who have a TSB of more than $3million at the beginning or end of the year, whichever is the highest
- In the first year of operation, being 2026/27 year, a one-off transitional rule means only in-scope individuals with a TSB of more than $3million at 30th June 2027 will be subject to Div 296 tax
- There are two thresholds being $3million and $10million
- Div 296 tax is additional tax of 15% on the proportion of earnings exceeding $3million and 10% on the proportion of earnings exceeding $10million
- An SMSF can elect to opt in to obtain a cost base adjustment for unrealised capital gains built up at 30th June 2026
- Ensure asset valuations are obtained in a timely manner and are supportable with independent third party evidence