Clearing the Confusion Around Division 296: What’s Changing and What It Means for You

There’s been a lot of confusion about the Division 296 tax — especially among clients with larger super balances who keep a close eye on superannuation changes. Many have asked: What happened to the old version? Is it really taxing unrealised gains? And what will the new system look like from 2026 onward?

This article breaks down the recent government updates in simple terms so you can clearly understand what’s changing and how it may affect your super or SMSF.

A Quick Recap — What Was the Original Division 296 Tax?

The original Division 296 proposal was designed to apply an extra 15% tax on the earnings of individuals with total super balances above $3 million.

However, it wasn’t based purely on income or realised profits — it was based on the change in your total super balance from one year to the next. That meant if the value of your investments went up (even without selling them), you could be taxed on that increase — in other words, taxing unrealised gains.

That was the most controversial part of the original design. Other problems included:

• The $3 million threshold wasn’t indexed, so more people would eventually fall into it over time.
• If your balance went down in a later year, you didn’t get a refund of tax previously paid.
• Losses could be lost if your balance dropped below $3 million or on death.
• The rules were extremely complex for defined benefit funds.

Because of these issues, accounting and superannuation bodies, including The Tax Institute, strongly opposed the original measure and called for major redesign.

The Government’s New Approach — A Fairer Version for 2026

On 13 October 2025, the Treasurer announced a redesigned and more practical approach, now called the Better Targeted Superannuation Concessions (BTSC) measure — still part of Division 296 but with key improvements.

Here’s what’s changing:

1. Only “Realised” Earnings Will Be Taxed

This is the biggest fix. The new Division 296 will only tax future realised earnings — meaning profits actually made from selling assets, receiving income, or similar events. Unrealised gains (paper increases in value) will not be taxed.

2. Two Thresholds Instead of One

Rather than a flat rule above $3 million, there will be two indexed thresholds:

• $3 million (indexed) — a 15% tax on realised earnings attributable to balances above this level
• $10 million (indexed) — an extra 10% (making 25% in total) on realised earnings attributable to balances above this level

This creates a fairer, tiered system. The higher your balance, the higher the top rate on your earnings portion — but it remains concessional compared to standard income tax.

3. Start Date Pushed to 1 July 2026

The first year the new rules will apply is 2026–27, not 2025–26. The first assessments will likely be issued in the 2027–28 financial year.

4. Indexation Built In

Both thresholds will increase with inflation (Consumer Price Index) — in $150,000 increments for the $3 million tier and $500,000 increments for the $10 million tier. This prevents more Australians being pulled into the system over time.

How Will “Realised Earnings” Be Calculated?

This part is still being refined, but Treasury has said that:

• A fund’s realised earnings will be based on its taxable income, adjusted for contributions and pension-phase income.
• Super funds will calculate each affected member’s share of those earnings on a fair and reasonable basis, following ATO guidance.
• The ATO will identify which members have balances over the threshold, contact their fund, and receive each fund’s calculation before issuing an assessment.

In plain terms: If your total super balance exceeds $3 million, your fund will report your share of realised profits to the ATO, and the ATO will calculate how much of your earnings fall above each threshold — and therefore what extra tax applies.

Who Will Actually Be Affected?

Very few Australians.

According to Treasury’s estimates:

• Less than 0.5% of Australians with super will be affected by the new measure in 2026–27.
• Less than 0.1% will have balances over $10 million.

For most people, this change will have no impact at all. For those with larger SMSFs or accumulated balances, however, it’s important to understand how the new tax will be applied to their fund’s realised gains.

Simple Examples

Let’s look at two quick examples from Treasury’s fact sheet:

Example 1 – Megan: $4.5 million total balance

Megan, aged 58, has $2.3 million in an APRA-regulated fund and $2.2 million in her SMSF.
In 2026–27, her total realised earnings are $300,000.

• The portion of her balance above $3 million is 33.3%.
• The portion above $10 million is nil.
  Her additional tax:
  15% × 33.3% × $300,000 = $15,000.

So, Megan will pay $15,000 in Division 296 tax, on top of the normal 15% super tax already paid inside the fund.

Example 2 – Emma: $12.9 million SMSF

Emma, aged 55, has a total super balance of $12.9 million and $840,000 of realised earnings in 2026–27.

• Portion above $3 million = 76.74%
• Portion above $10 million = 22.48%
  Her additional tax:
  (15% × 76.74% × $840,000) + (10% × 22.48% × $840,000) = $115,581.

This effectively means her realised earnings above $10 million are taxed at a combined 25% rate, which is still lower than most personal tax rates.

What We Still Don’t Know

While the direction is clearer and fairer, there are still a few “known unknowns”, including:

• Exactly how funds will split pre- and post-2026 gains, especially for investments held for many years.
• Whether distributions from trusts or companies that include pre-2026 gains will be carved out of the new calculation.
• How defined benefit members will be treated under the new system.
• Whether the government will allow people with super balances over $10 million to withdraw excess amounts if they haven’t met a condition of release.

These details will be finalised through consultation before the law is introduced — expected sometime in 2026.

Why the Change Matters

This update reflects a balancing act between fairness and sustainability. Superannuation was designed to help Australians save for retirement, not to build tax-free estates for the ultra-wealthy.

By focusing on realised earnings and indexing thresholds, the new Division 296 rules:

• Reduce complexity and perceived unfairness of taxing unrealised gains
• Maintain concessional treatment for all super funds
• Make the system more aligned with normal income tax principles

For SMSF trustees and high-net-worth individuals, it means more accurate tax outcomes — but also the need for careful monitoring of fund performance and reporting.

What’s Next

The government will introduce legislation as soon as possible in 2026, after consulting with the superannuation industry, accountants, and fund administrators on the finer details.
Until then, no action is required — but it’s wise to start discussions early if your balance is approaching or above the $3 million mark.

If you’re planning to set up an SMSF, or you’re not happy with the advice you’re receiving about your current SMSF and upcoming Division 296 changes, our specialists at Investax can help.

We provide clear, practical guidance on how new super rules may impact your wealth and how to structure your fund tax-effectively.

Reference

Treasury Fact Sheet 

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