From 1 July 2026, a new superannuation tax has been introduced in Division 296 of the Income Tax Assessment Act 1997 (Cth).
Division 296 applies to reduce the concessional tax treatment of superannuation earnings for Australians with total superannuation balances that exceed the 'large' superannuation balance threshold of $3 million. Further, a higher amount of tax is also payable to the extent that a person's total superannuation balance exceeds the 'very large' superannuation balance threshold of $10 million.
For members with substantial superannuation savings, Division 296 may affect decisions made throughout the year, including whether assets should be realised, how pensions should be structured and whether a fund remains appropriately positioned for succession.
The practical question for affected members and their advisors is not simply whether they exceed a threshold on 30 June 2026. It is whether their investment, pension and family circumstances could create a continuing exposure to the new Division 296 tax, and what can be done about it.
1. How Did Division 296 Evolve?
In February 2023, the Australian Government announced a proposal to impose additional tax on individuals with total superannuation balances above $3 million. The original model drew immediate attention because it proposed taxing unrealised investment gains, a feature that generated significant industry concern. Draft legislation released in October 2023 confirmed that concern, and extensive consultation followed
In October 2025, the proposal was substantially revised. The revised framework introduced a second threshold at $10 million, applied additional tax rates in a tiered structure, and included indexation measures. Importantly, the taxation of unrealised gains was removed.
The Treasury Laws Amendment (Building a Stronger and Fairer Super System) Bill 2026 was introduced into Parliament in February 2026 with minor amendments arising from consultation, and the legislation passed in March 2026 with a commencement date of 1 July 2026. For trustees and advisers, the key takeaway from this history is that the final regime centres on threshold measurement, earnings attribution and transitional cost base rules, not unrealised gains.
2. The Basics: Who Is Affected and What Are the Rates?
Division 296 took effect on 1 July 2026 and applies to members whose Total Super Balance (TSB) exceeds the relevant thresholds. There are two tiers:
- Large Super Balances: Where a member’s TSB exceeds $3 million, an additional 15% tax applies to the relevant proportion of their taxable superannuation earnings attributable to the excess above that threshold.
- Very Large Super Balances: Where a member’s TSB exceeds $10 million, a further 10% applies to the relevant proportion attributable to the excess above $10 million.
Importantly, the Division 296 tax is proportional, a member does not become subject to the additional rate on all earnings merely because they cross a threshold. Instead, the additional tax applies to the proportion of earnings calculated by reference to the member’s excess balance.
Who Pays the Tax?
Division 296 tax is assessed to the individual member, not the SMSF. However, the member may elect to release money from their superannuation interest to meet the liability. This may require trustees to consider the fund’s liquidity and the effect of any withdrawal on member balances.
How is the Tax Calculated?
The calculation works by first determining the individual’s Division 296 earnings for the year. It then identifies what proportion of those earnings is attributable to the member’s balance above the relevant threshold. The applicable additional tax rate is applied to that proportion. The result is that a member with a balance only slightly above $3 million will face a relatively modest additional liability, while a member well above the threshold will have a larger share of their earnings exposed to the additional tax.
The starting point for the earnings figure is the SMSF’s relevant taxable income, which is then adjusted as required by Division 296. The key adjustments are as follows:
- Assessable contributions are excluded from the calculation. These represent transfers of capital into the superannuation system rather than investment returns generated by existing fund assets.
- Net exempt current pension income is added back into the earnings figure. This ensures that income supporting pension-phase interests is not automatically excluded from the Division 296 calculation.
- Non-arm’s length income is excluded, as it is already dealt with under separate higher-rate provisions.
- The required capital gains adjustments are then applied. These include any relevant deferred gains from historical CGT events and adjustments arising from a Division 296 cost base reset election.
- Where the fund has multiple members, the resulting fund-level earnings must be attributed between them. This will generally require actuarial input, particularly where members hold different types of interests (pension and accumulation) or where their balances have changed during the year.
3. Balance Exposure - Measurement, Timing and Thresholds
One of the most important features of Division 296 is how a member’s balance is measured. From the 2027-28 financial year, the TSB used for Division 296 purposes is the greater of:
- the member’s balance at the start of the financial year; and
- the member's balance at the end of the financial year.
The Government introduced this as an integrity measure to prevent members from reducing their balance immediately before year end in order to fall below the thresholds.
For SMSF trustees, the consequence is that Division 296 exposure must be monitored throughout the year. A member who begins the year above $3 million cannot avoid the regime by withdrawing funds before 30 June. Likewise, a member who begins the year with less than $3 million will be caught by the regime if their superannuation earnings push their balance above $3 million by the end of the financial year.
Depending on the relevant valuation and calculation rules, events occurring during the year (such as large asset revaluations, insurance payouts, reversionary pension receipts or unexpected contributions) may also shift a member’s exposure.
For completeness, we note that for the 2026-27 financial year only, a member's balance is measured only by reference to their TSB at the end of the 2026-27 financial year rather than the beginning, accordingly their may be time to deal with or reduce a member's balance prior to the end of this financial year.[1]
4. Investment, Liquidity and the Cost Base Election
Division 296 changes the way SMSF trustees should approach portfolio decisions. Two areas deserve particular attention:
- the transitional cost base election; and
- liquidity planning.
As outlined above, the Division 296 earnings calculation is not simply a mirror to the SMSF’s accounting profit. It begins with relevant taxable income and applies specific legislative adjustments. Where multiple members are involved, earnings generally need to be attributed between them, which may require actuarial input.
The Transitional Cost Base Reset
One transitional planning option allows a SMSF to elect a Division 296 specific cost base reset for all CGT assets held by the fund at 30 June 2026.
If adopted by a SMSF, the election may establish a Division 296 specific cost base for all CGT assets of the fund that is based on the market value of the CGT assets of the fund at the end of 30 June 2026, rather than the actual cost base of the assets for CGT purposes.
In effect, this is a grandfathering provision where unrealised gains sitting in a SMSF for a period before the introduction of Division 296 can be excluded from the Division 296 tax calculation.
The reset applies only for Division 296 purposes. It does not replace the fund’s ordinary CGT cost base for calculating the fund's taxable income. The reset cost base (if an election is made) is only relevant to the Division 296 tax calculation.
SMSF Trustees may therefore need to maintain separate records for ordinary CGT and Division 296 calculations. The election applies to all CGT assets held by the fund at 30 June 2026, cannot be revoked and must be made by the due date of the 2026-27 SMSF annual return or income tax return, as applicable.
SMSF Trustees should complete a whole-of-portfolio review before making the election and seek appropriate legal and financial advice, considering unrealised gains and losses, intended disposals, liquidity, projected growth and each member’s likely Division 296 position.
Liquidity Planning
Any Division 296 liability will need to be funded from somewhere. For SMSFs concentrated in illiquid assets (such as direct property, private company shares or limited partnerships), the key issue is whether the fund can meet the new Division 296 tax liability without being forced to sell assets at an inopportune time (should the individual member not be in a position to meet the liability).
Trustees should be considering projected cash flow, investment income, available reserves and the timing of any planned withdrawals or asset realisations.
5. Succession - How Death Can Change Exposure
Division 296 also has an important interaction with succession planning. When a member dies or loses capacity, the consequences may extend beyond the usual estate planning considerations if the transfer of a deceased spouse's member balance could push their surviving spouse over the 'large' or 'very large' balance thresholds.
Consider two members who each hold pension interests of $1.6 million within their SMSF. Neither individually exceeds the $3 million threshold. However, following the first member’s death, a reversionary pension may increase the surviving member’s TSB to approximately $3.2 million, bringing them within the scope of Division 296. While the reversion preserves income continuity for the survivor, the potential Division 296 exposure that follows should form part of the family’s overall succession planning.
Insurance proceeds paid into a fund following a member’s death may also push the benefit pool above the Division 296 thresholds.
Similarly, where death benefits are delayed (whether due to disputes, liquidity constraints or probate) the estate may face ongoing Division 296 assessments while those benefits remain unresolved within the estate administration and disputes environment. Prompt administration of death benefits has always been good practice. Division 296 now adds a quantifiable financial reason to prioritise it.
6. What Should SMSF Trustees Be Doing Now?
Division 296 is not a tax you calculate once a year and move on. It is an ongoing planning consideration that intersects with asset selection, pension design, family governance and estate structuring. As a starting point, trustees and their advisers should consider:
- confirming whether any member’s TSB is approaching or above the 'large' $3 million threshold, and modelling projected growth to anticipate future exposure;
- reviewing the cost base reset election as a matter of priority, given the irrevocable deadline attached to the 2026–27 return;
- assessing liquidity and whether the fund can meet a Division 296 liability without selling illiquid assets (if required);
- revisiting reversionary pension nominations and death benefit strategies in light of the surviving member’s projected balance;
- checking that incapacity planning documents (EPOAs, trust deed succession clauses, corporate constitutions) allow the fund to act quickly if governance decisions are needed; and
- engaging their SMSF accountant, actuary and legal adviser early to assist at each stage listed above.
[1] Income Tax (Transitional Provisions) Act 1997 (Cth), s 296-1.
