Unpacking the $3M Division 296 Tax

As the federal government moves to introduce additional tax on superannuation earnings above $3 million (known as the Division 296 tax), concerns emerged about its broader implications for investment strategies, retirement planning, and even the property market.

In welcome news, Treasurer Jim Chalmers has announced that the Federal Government has listened to industry feedback and intends to make major changes.

If passed by Parliament, the tax will apply from 1 July 2026 (delayed from the original 2025 start date), effectively doubling the tax rate from 15% to 30% on earnings attributable to balances exceeding $3 million and almost tripling the tax rate from 15% to 40% on earnings attributable to balances exceeding $10 million.

The change is expected to directly affect fewer than 0.5% of investors, or around 80,000 people. Treasurer Jim Chalmers has described it as “a modest change” that retains concessional treatment for large balances, albeit to a lesser extent. He says the measure will help fund priorities such as Medicare, cost-of-living relief, and tax cuts.

According to the Grattan Institute, super tax concessions cost the federal budget nearly $50 billion annually. The Institute argues that super has increasingly become a “taxpayer-subsidised inheritance scheme”, with Treasury projecting that by 2060, one-third of super withdrawals will be made as bequests, up from one-fifth today.

What’s new? (October 2025)

While some details are still to be clarified, the updates represent a positive shift that may provide comfort to those potentially impacted.

Two-tier thresholds and tax rates

• Total super balance (TSB) between $3 million and $10 million: An additional 15% tax will apply to a proportion of income.
• TSB exceeding $10 million: A higher 25% tax will apply to income above this threshold.

Key changes to the tax design (October 2025)

Tax on unrealised gains removed

One of the most significant updates is the removal of tax on unrealised gains. The Government has confirmed that tax will now only apply to actual income, not asset movements. This change alleviates concerns for those holding assets with fluctuating values, such as property or shares.

Indexed thresholds

Both the $3 million and $10 million thresholds will be indexed in line with the transfer balance cap (currently the pension cap). This adjustment helps avoid bracket creep, ensuring the tax remains targeted over time.

Delayed implementation date

The start date has been pushed back to 1 July 2026, giving trustees and members more time to plan and make proactive decisions, rather than reacting to retrospective laws.

Implications for investors

The original inclusion of unrealised gains raised concerns about long-term asset holding and cash flow challenges, particularly for SMSFs with illiquid assets. With this now removed, some of those concerns are eased.

However, the new tiered tax rates and thresholds may still influence:

• Asset allocation strategies, especially within SMSFs.
• Inheritance planning, as super may become less attractive for wealth transfer.
• Investment structures, prompting exploration of alternatives outside super

Navigating the changes

With the tax changes approaching, our financial advisers work closely with clients to ensure their portfolios remain aligned with their goals. Strategies to consider include:

• Equalising super balances between spouses: Through contribution splitting or spouse contributions.
• Withdrawing surplus funds: Investing outside super (eg in shares, trusts, or companies) may be more tax-effective, depending on personal circumstances.
• Asset location review: Holding slower-growing, income-generating assets inside super and faster-growing assets outside may reduce exposure to unrealised gains.
• Accurate record-keeping: SMSF trustees should ensure year-end valuations are precise to avoid overpaying tax.

Final thoughts

The Division 296 tax represents a notable shift in Australia’s retirement savings landscape. While the changes are now more targeted and less punitive, high-balance super holders should still review their strategies carefully.

If you’re managing a high-balance super fund, planning for retirement, or considering alternative investment structures, our team can help you navigate the proposed changes with confidence. Contact our advisers today to discuss how to adapt your strategy and stay ahead of the curve.

Sources

i Better targeted superannuation concessions – factsheet (PDF)

ii Interview with Michelle Grattan, Politics podcast, The Conversation | Treasury Ministers

iii, iv Tax reform will make super fairer and the budget stronger – Grattan Institute

v $3 million superannuation tax change sparks property warning as ‘panic’ selling begins