DIV296 Tax: What it looks like today

The new Division 296 superannuation tax has become a hot topic in financial circles, with even people who may never be directly affected discussing it. As a wealth advisor, I’ve fielded many questions about what this tax means and how it will work. In a recent blog, I discussed the key takeaways from DIV296 once the proposed tax was revised. Now, I would like to update you on Division 296, a proposed tax targeting large super balances, as it’s evolving in important ways.

When Division 296 was first proposed, it raised eyebrows. The initial plan, which we discussed in March 2024, was to apply an additional 15% tax on “superannuation earnings” to individuals with a total super balance (TSB) exceeding $3 million. In simple terms, if your TSB grew above $3 million during a year, that growth would be taxed at 15% on top of normal super taxes. This approach was controversial for several reasons:

• Taxing unrealised gains: Under the original formula, you could owe tax on paper gains, increases in your super balance due to market growth, even if you hadn’t sold any assets. This was unprecedented and widely seen as unfair. Imagine paying tax just because your property or shares went up in value on paper, without actually cashing out.
• Cash-flow concerns: Many people with high super balances are “asset rich, cash poor.” Think of a self-managed super fund holding a property or farm land, lots of value on the books, but not much cash income. Taxing unrealised gains could force asset sales or other difficult choices just to pay the tax bill.
• No inflation adjustment: The $3 million threshold was not indexed to inflation initially. So, while only a small number of people (around 80,000) would have been affected initially, over time, more Australians could cross that line simply due to growth and inflation. What started as a tax on the ultra-wealthy might snag more middle-class retirees.
• No relief for losses: If your super went down in a year, there was no provision to get a refund or offset for negative “earnings.” It felt like a one-way street, tax the gains but ignore the losses, adding to the sense of inequity.

We highlighted these issues and closely monitored developments. The good news is that the government listened to feedback. On 13 October 2025, the Treasurer announced significant changes to the Division 296 proposal that inject some much-needed common sense and fairness.

The revamped Division 296 tax introduces a two-tier structure and other key adjustments, making the rules more balanced. Here’s how it works now:

• Start date deferred: First, the clock has been pushed back. The Division 296 tax will now commence on 1 July 2026, a one-year delay from the original start date. That means the first assessments won’t be due until after the 2026–27 financial year. This gives everyone more time to prepare and for the finer details to be ironed out.
• Tier 1 – $3 million threshold: If your total super balance exceeds $3 million, the portion of your super earnings attributable to the balance above $3 million will attract an extra 15% tax. You’ll still pay the usual 15% tax within the fund on all earnings, but now the slice of earnings from the portion exceeding $3 million receives an additional 15% personal tax. In effect, earnings on that portion of your super are taxed at a total rate of 30%.
• Tier 2 – $10 million threshold: A second threshold has been introduced at $10 million. For super balances over $10m, there’s an additional 10% tax on the earnings attributable to the balance above $10m, on top of the first 15%. This means that ultra-large balances face a total extra tax of 25% on the earnings for the portion exceeding $10 million. Combined with the fund’s tax, those earnings could be taxed at a rate of up to 40%. This new tier targets explicitly those with very high super wealth, ensuring they contribute a bit more.
• No more tax on unrealised gains: Crucially, unrealised gains are off the table. The “earnings” that Division 296 will tax are to be based on actual taxable income, such as interest, dividends, rent, and realised capital gains (profits from assets you have sold). If your fund’s investments increase in value but you haven’t sold them, that growth won’t count as taxable earnings under this rule. This change brings the policy back in line with standard tax principles and provides relief to those who were worried about punitive bills on paper profits.
• Indexed thresholds: Unlike the original plan, both the $3 million and $10 million thresholds will be indexed to inflation over time. They won’t rise every single year, but they’ll increase in jumps. The $3 million threshold will increase in $150,000 increments, and the $10 million threshold will increase in $500,000 increments as inflation accumulates. This indexation will help maintain the intent of targeting only the largest super balances, rather than dragging in more people simply due to inflation or nominal investment growth.

In practice, the two-tier system means that someone with, say, a $6 million super balance will have about half their fund above the $3 million mark. Roughly half of that person’s annual super earnings would incur the extra 15% tax. Meanwhile, an individual with a $12 million balance exceeds both thresholds \the portion from $3 million to $10 million would get the 15% extra tax, and the portion above $10 million would get the whole 25% extra. The system scales with how far above the thresholds your balance is. If your super balance is under $3 million, you won’t be subject to any Division 296 tax at all.

For Australians who are fortunate enough to have substantial superannuation savings, the introduction of Division 296 tax will create an additional tax liability each year once it takes effect. It’s essentially a way to rewind a portion of the generous tax concessions on super for balances beyond a certain point. Rather than viewing it as a punishment, think of it as the rules adjusting so that super remains sustainable and equitable. It was perhaps only a matter of time; governments of all stripes have eyed the billions held in super by wealthier retirees as “low-hanging fruit” for revenue.

The recent changes are generally positive in terms of fairness. They address the biggest fear, which was the prospect of taxing unrealised gains. Now, if your super assets increase in value but you have a bad year later or haven’t sold anything, you won’t face a tax bill solely on theoretical growth. You also won’t be unfairly caught by a stagnant $3 million cap, since that cap will increase over time with inflation.

If your super fund has a year of poor performance or losses, no Division 296 tax would apply for that year because there are no earnings to tax. Under the original proposal, you might have paid tax in a good year and gotten no relief in a bad year. The new approach aligns the tax with actual outcomes.

That said, an extra tax is still an additional tax. If you expect to have over $3 million in super, either currently or in the future, it’s wise to plan. Some strategies and considerations include:

• Review your super balance projection: Are you on track to exceed $3 million in the coming years? How about $10 million? This could influence decisions on additional contributions or whether to hold certain assets inside vs. outside super.
• Maximise your tax-free pension where possible: Remember that you can currently transfer up to $1.9 million into a tax-free retirement pension account (per person). Balances above that stay in a 15% taxed environment (accumulation phase). With the Division 296 tax, amounts exceeding $3 million will effectively face higher taxes. Therefore, making the most of the tax-free cap and utilising spouse strategies, such as splitting super with a lower-balance spouse, could become more valuable.
• Consider liquidity: If you have a lot of illiquid assets in super, such as property, ensure you have some liquidity or a plan in place once the new tax kicks in. Even though it’s only on realised gains now, if you eventually sell a significant asset and realise a big gain, you could see a substantial Division 296 tax bill the following year. Planning how to fund it will be important.
• Stay informed: The final legislation is expected to be drafted in early 2026. There may be further fine details or tweaks, such as how exactly super funds will calculate each member’s share of earnings, or how certain events, like receiving an inheritance into super (if that were possible), or wind-ups, are handled. We will update you as more information becomes available. Being aware of the rules means fewer surprises down the track.

My team and I are actively monitoring these developments to ensure our clients understand the implications for their retirement plan. We’re already strategising for how best to manage the Division 296 tax with minimal impact on your financial goals.