The DIV296 Tax Takeaways

After a lengthy two-year saga and debate about the proposed changes to superannuation tax laws and the implementation of the DIV296 tax, we now have clarity and, thankfully, a degree of common sense. As the past Australian cricket captain Ian Chappell famously said, “The only issue with common sense is that it is not that common.”

However, this shift in direction from the Australian federal government on this tax seems to have struck a chord that, on paper, financial experts and everyday Australians can be comfortable with. As a financial advisor who has followed this saga closely, I want to explain why this tax was introduced, why the original proposal was scrapped in favour of a fairer system, who will be impacted, and what it means for Australia’s long-term tax strategy.

Australia’s superannuation system was designed to encourage everyone to save for retirement. Since the 1990s, superannuation has grown into a $4 trillion national nest egg that reduces pressure on the age pension. Superannuation earnings are concessionally taxed to promote savings, generally 15% in accumulation and 0% in pension phase, a much lower rate than most pay on income. These generous tax concessions are a reward for funding your own retirement.

However, with government budgets under strain and superannuation balances swelling, policymakers have cast an eye on the tax breaks high-balance accounts enjoy. A small number of Australians hold super accounts well above $3 million, reaping outsized tax benefits. From the government’s perspective, this looked like low-hanging fruit for revenue and an issue of fairness: should someone with $10 million in super pay virtually no tax on their investment earnings? In contrast, ordinary workers pay full fare on wages? The original Division 296 tax proposal 2023 aimed to “better target superannuation concessions” by making those with large super balances contribute more to the tax base. Sounds good, right?, However, the original proposal had too many flaws.

When first announced, Division 296 sought to apply an extra 15% tax on superannuation earnings for balances over $3 million. In theory, if you had $3.5 million in super, the investment earnings on the $500,000 above the threshold would be taxed at 30% instead of the usual 15%. This sounds straightforward, but the devil was in how “earnings” were calculated. The initial formula was unprecedented and convoluted: it included unrealised gains on assets. In plain language, if your super portfolio rose in value during the year, for example, your property or shares increased on paper, you could be taxed on that increase even if you didn’t sell the asset and pocket the gain.

This approach broke with conventional tax principles. For good reason, Australia has never taxed unrealised gains in this way. Taxing paper gains could force people to find cash for a tax bill when they haven’t made a profit yet. If your self-managed super fund owns an illiquid asset like a property or a farm, you might be “wealthier” on paper after a valuation jump, but you’d have no actual cash until you sell. The prospect of selling assets or taking on debt just to pay a tax on theoretical gains caused an uproar. It also raised the spectre of double taxation, paying tax on a rise in value, then paying tax again later when the asset is sold for a real gain.

Not surprisingly, the original Div 296 design drew fierce criticism from across the super industry and tax experts. It was seen as complex, unfair, and setting a dangerous precedent. Meanwhile, thousands of Australians were stuck in limbo awaiting clarity. Clients of mine with large super balances were left asking, “Do we need to restructure our finances? Will we get hit with this new tax or not?” A question, until this week, I and others in our industry could not answer with any certainty.

Taking an apolitical position, this reset illustrates that our system of government, from time to time, works. The lobbyists worked hard, and the government listened. Faced with mounting pressure, Treasurer Chalmers announced a significant rewrite of the Division 296 proposal, essentially shelving the unpopular elements of the original plan. In what some call a backflip and I call a dose of common sense, the idea of taxing unrealised gains was dropped entirely. Instead, the tax will apply only to actual earnings: think interest, dividends, rental income, and realised capital gains on assets that were sold. In short, you’ll only be taxed on money you’ve genuinely made, not just on paper profits. This change aligns the policy with fundamental fairness and how our tax system works.

The revised plan also introduced a tiered tax structure for super balances:

• 30% tax on earnings attributed to balances above $3 million, up to $10 million. Effectively, the earnings from $3–10M in super will incur an extra 15% on top of the standard 15%.
• 40% tax on earnings for the portion of balances above $10 million. This new top tier targets the ultra-high-end super holders.

Another welcome improvement is the indexation of the thresholds. The $3M and $10M caps will adjust with inflation over time. This means we won’t see “bracket creep” silently pulling in more people yearly due to growth and inflation. In the original plan, $3 million was a frozen line over decades; many ordinary workers could eventually have hit that purely due to inflation. Indexing ensures the tax truly remains targeted at the top end of town.

Finally, the start date for these changes has been pushed out to 1 July 2026, with the first assessments based on balances at 30 June 2027. This delay gives everyone, from policymakers to super funds and advisors like myself, time to digest the new rules and plan accordingly. As Treasurer Chalmers noted, this reform was always about making super concessions more sustainable and fair, but now it’s being done far more practically. Even former PM Paul Keating, the architect of our super system, endorsed the revision, noting that taxing only on realisation solidifies confidence in the system’s long-term stability.

The government estimates less than 0.5% of people will be affected by this tax in 2026–27. In raw numbers, roughly 90,000 Australians have super balances over $3 million, and only about 8,000 have more than $10 million in super.

For the vast majority of workers and retirees, nothing changes. If your super is below $3M, and for context, the average balance at retirement is only a few hundred thousand, you continue enjoying the same tax concessions as before. The Division 296 tax is aimed squarely at the large balances enjoying disproportionately large tax breaks.

That said, if you are one of the fortunate few approaching these thresholds, it’s natural to feel concerned about new taxes. The good news is that the revised rules are more logical, and there are planning opportunities to mitigate the impact. We will be looking at more tailored strategies for our clients in these brackets, and over the coming months, you will hear from us to begin tailoring a practical approach to your wealth management, which can soften the blow of any new tax.

My hope as an advisor is that we get some stability in the superannuation rules going forward. Constant tinkering with super, even with good intentions, erodes people’s confidence in the system. I’ve heard younger clients tell me, “Why bother putting extra into super? The rules will just change by the time I retire.” It’s a fair frustration. Super is a decades-long game, and Australians must trust that the goalposts won’t keep shifting.

The Division 296 experience is a cautionary tale. The initial proposal caused confusion and anxiety, only to be overhauled after two years of debate. The new outcome is much more sensible and fair, closer to the fundamental tax principles.

Australia’s long-term tax strategy is grappling with an aging population and the rising cost of retirement. Super tax concessions currently cost the budget tens of billions annually and are forecast to eventually exceed even the Age Pension outlays. We must maintain the overall attractiveness of superannuation for ordinary people so they continue to save and invest for a self-funded retirement. It’s a delicate balance between encouraging personal responsibility through tax incentives and ensuring fairness and fiscal sustainability.

With this new Division 296 reform, the government is trying to strike that balance. After implementing these changes, I hope they let the dust settle. This will give Australians and their advisors a chance to plan with certainty. If further tweaks are needed, let’s make them with plenty of consultation and thought, not as knee-jerk grabs at the piggy bank.

The DIV296 tax seems to have landed in a reasonable place. As an advisor, I’m relieved to see the unrealistic idea of taxing unrealised gains put to bed. If you’re among those affected, now is the time to review your strategy. There are ways to manage the impact and even turn the situation to your advantage with smart planning.

Ultimately, we all want a strong and trustworthy superannuation system that supports Australians in retirement without putting undue strain on the public purse. With these changes and a commitment to stability going forward, we move closer to that goal.