Unpacking the $3M Division 296 Tax

As the federal government moves to introduce a new 15 per cent tax on superannuation earnings above $3 million (known as the Division 296 tax), concerns have emerged about its broader implications for investment strategies, retirement planning, and even the property market.

If passed by Parliament, the tax will apply from 1 July 2025, effectively doubling the tax rate from 15% to 30% balances exceeding $3 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.

How will the new tax work?

• Annual balance check: Each 30 June, the ATO will assess the total value of all your super accounts.
• Growth is measured: The ATO compares this with the previous year’s balance, adjusting for net contributions and withdrawals. Unrealised gains are included.
• Only the portion above $3 million is taxed: For example, if your balance is $4 million, only the growth on the $1 million above the cap is affected.
• Extra 15% payable: The ATO will issue a tax bill. You can pay it personally or request a release from your super fund.

Note: Earnings losses can be carried forward to offset future tax liabilities.

Implications for investors

The inclusion of unrealised gains in the tax calculation may discourage long-term asset holding and create cash flow challenges, particularly for SMSFs holding illiquid assets like business premises or farms.

Many commentators expect a shift in asset allocation, especially within SMSFs. Property analysts also predict that commercial real estate may become more attractive due to its stronger income yields relative to capital growth.

The tax may also reduce super’s appeal as an inheritance tool, prompting high-net-worth individuals to explore alternative wealth transfer strategies.

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 (e.g. 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

This proposed Division 296 Tax represents a notable change in Australia’s retirement savings framework. While it’s been framed as a modest and targeted measure, the inclusion of unrealised gains considered.

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 Division 296 Tax 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