Div 296 Explained: Examples, Calculations and Considerations

A significant shift is on the horizon for Australians with substantial superannuation balances. Proposed changes to superannuation tax, specifically Division 296, are set to introduce an additional 15% tax on earnings for balances exceeding $3 million. It’s crucial to understand these changes before they come into effect to assess their potential impact on your retirement

What is Division 296?

Division 296 is an additional tax of 15% on earnings attributable to the portion of an individual’s total superannuation balance (TSB) that exceeds $3 million. This new tax aims to make superannuation concessions more targeted and reduce the overall cost to the government. It will be levied directly on individuals, separate from the existing superannuation fund tax.

What does Div 296 change and how will it work

Here is how Division 296 will work:

Tax on unrealised gains

One of the most contentious aspects of Division 296 is that it will apply to “earnings” which include both realised and unrealised capital gains. This means you could be taxed on an increase in the value of your superannuation investments even if you haven’t sold them and converted them to cash. This is a departure from the traditional Australian tax approach, where tax on capital gains is generally only triggered upon sale.

No refund for negative earnings (but losses can be carried forward)

If your superannuation balance experiences negative earnings in a given year, or if your TSB subsequently falls below $3 million, you will generally not receive a refund for Division 296 tax paid in a prior year. However, any negative earnings can be carried forward to offset positive Division 296 earnings in future income years. This carry-forward mechanism is crucial but might not always fully compensate for past tax paid on unrealised gains that later reverse.

Individual assessment

The tax liability for Division 296 will be assessed to the individual, not the superannuation fund. This means the ATO will issue a notice of assessment directly to the individual taxpayer. For those with a Self-Managed Superannuation Fund (SMSF), each member’s balance is assessed individually, not the fund as a whole.

Payment of tax

Individuals will have the option to pay their Division 296 tax liability from outside their superannuation, or they can elect to have an amount released from their superannuation fund to cover the tax. If an individual chooses to have the payment released from their super fund, they will typically have 60 days from the notice of assessment to make this election. The tax generally becomes due and payable within 84 days of the Commissioner issuing the notice of assessment.

Non-indexed threshold

The $3 million threshold for Division 296 will not be indexed. This means that over time, as inflation and investment returns increase superannuation balances, more individuals are likely to be caught by this tax, even if their real wealth has not significantly increased.

Aggregation of all super accounts

Division 296 will aggregate all of an individual’s superannuation accounts to determine their total superannuation balance (TSB). This includes all accumulation and retirement phase accounts.

How to calculate Div 296 tax changes

The calculation of Division 296 tax involves several steps:

1. Calculate the Superannuation Earnings:
   • This is broadly the movement in your total superannuation balance (TSB) from the start to the end of the financial year, adjusted for any contributions (added back) and withdrawals (deducted).
   • Formula: Superannuation Earnings = (TSB at end of FY + Withdrawals) – (TSB at start of FY + Contributions)
   • Note: For the purposes of this calculation, the TSB at the start of the financial year is taken to be the greater of your actual TSB at the start of the year or $3 million. Similarly, the TSB at the end of the financial year is considered to be the greater of your actual TSB at the end of the year or $3 million.
2. Determine the Proportion of Earnings Above the Threshold:
   • This is the percentage of your TSB at the end of the financial year that exceeds the $3 million threshold.
   • Formula: Proportion = (TSB at end of FY – $3,000,000) / TSB at end of FY
3. Calculate the Taxable Superannuation Earnings:
   • This is the portion of your superannuation earnings that will be subject to the additional tax.
   • Formula: Taxable Superannuation Earnings = Superannuation Earnings x Proportion
4. Apply the Division 296 Tax Rate:
   • The additional tax is 15% of the Taxable Superannuation Earnings.
   • Formula: Div 296 Tax = Taxable Superannuation Earnings x 15%

Example of how to calculate Div 296

Let’s consider an example:

Scenario: Sarah has a total superannuation balance (TSB) of $4.5 million on 1 July 2025. On 30 June 2026, her TSB has grown to $5 million. During the year, she made no contributions or withdrawals.

1. Calculate Superannuation Earnings:
   • TSB at end of FY = $5,000,000
   • TSB at start of FY = $4,500,000
   • Withdrawals = $0
   • Contributions = $0
   • Superannuation Earnings = ($5,000,000 + $0) – ($4,500,000 + $0) = $500,000
2. Determine Proportion of Earnings Above Threshold:
   • Proportion = ($5,000,000 – $3,000,000) / $5,000,000 = $2,000,000 / $5,000,000 = 0.40 or 40%
3. Calculate Taxable Superannuation Earnings:
   • Taxable Superannuation Earnings = $500,000 x 0.40 = $200,000
4. Apply Div 296 Tax Rate:
   • Div 296 Tax = $200,000 x 15% = $30,000

In this example, Sarah would pay an additional $30,000 in Division 296 tax.

How much extra tax will you pay under Division 296

The actual tax paid under Division 296 will depend on your specific superannuation balance and the earnings generated within your fund. Here’s a table illustrating potential scenarios, assuming a consistent 5% annual earning rate (before any existing super fund tax) and no contributions or withdrawals for simplicity. These are illustrative and actual figures will vary.

Superannuation Balance (Start of FY)	Superannuation Balance (End of FY with 5% growth)	Earnings	Proportion above $3M Threshold	Taxable Earnings for Div 296	Tax paid after Div 296 (additional 15%)	Difference
$3,000,000	$3,150,000	$150,000	4.76%	$7,140	$1,071	$6,069
$3,500,000	$3,675,000	$175,000	18.49%	$32,357	$4,853	$27,503
$4,000,000	$4,200,000	$200,000	28.57%	$57,140	$8,571	$48,569
$4,500,000	$4,725,000	$225,000	36.50%	$82,125	$12,319	$69,806
$5,000,000	$5,250,000	$250,000	42.86%	$107,150	$16,072	$91,077
$5,500,000	$5,775,000	$275,000	47.99%	$131,972	$19,795	$112,176
$6,000,000	$6,300,000	$300,000	52.38%	$157,140	$23,571	$133,569

Please note: The “Tax paid before Div 296” column is excluded from this table, as Div 296 is an additional tax on earnings attributable to the excess balance, not a replacement of existing taxes on super fund earnings (which are typically 15% in accumulation phase and 0% in retirement phase for certain balances). The table directly shows the additional tax liability under Division 296.

Superannuation Balance	Tax paid before Div 296	Tax paid after Div 296	Difference
$3M	$ 7,140.00	$ 1,071.00	$ 6,069.00
$3.5M	$ 32,357.50	$ 4,853.63	$ 27,503.87
$4M	$ 57,140.00	$ 8,571.00	$ 48,569.00
$4.5M	$ 82,125.00	$ 12,318.75	$ 69,806.25
$5M	$ 107,150.00	$ 16,072.50	$ 91,077.50
$5.5M	$ 131,972.50	$ 19,795.88	$ 112,176.62
$6M	$ 157,140.00	$ 23,571.00	$ 133,569.00

Case studies

Here are some case studies that showcase the impact of Division 296.

Case study 1: David – $3,200,000 superannuation balance

David is 62 years old and has a superannuation balance of $3,200,000 as of 1 July 2025. He is still working part-time and does not plan to make any significant contributions or withdrawals in the coming year. His super fund generates a 6% return in the 2025-26 financial year.

Situation: David’s balance is only slightly above the $3 million threshold. While his fund is performing well, the extra tax from Division 296 will reduce his net earnings.

Calculation of Div 296 tax:

• TSB at 1 July 2025: $3,200,000
• Earnings (6% of $3,200,000): $192,000
• TSB at 30 June 2026: $3,200,000 + $192,000 = $3,392,000
• Superannuation Earnings (for Div 296): ($3,392,000 + $0) – ($3,200,000 + $0) = $192,000
• Proportion above $3M threshold: ($3,392,000 – $3,000,000) / $3,392,000 = $392,000 / $3,392,000 ≈ 0.1156 or 11.56%
• Taxable Superannuation Earnings: $192,000 x 0.1156 ≈ $22,195.20
• Div 296 Tax: $22,195.20 x 15% = $3,329.28

Impact and Payment: David will receive an assessment for approximately $3,329.28 in Division 296 tax. He can choose to pay this from his personal cash reserves or request a release authority for the amount to be paid directly from his super fund. Given his balance is only just over the threshold, this additional tax represents a relatively small but noticeable reduction in his net superannuation growth.

Case study 2: Maria – $5,690,000 superannuation balance

Maria is 58 years old and has an SMSF with a total superannuation balance of $5,690,000 as of 1 July 2025. Her SMSF holds a diversified portfolio, including some illiquid assets like direct property. Her fund experiences a 7% return in the 2025-26 financial year.

Situation: Maria’s balance is significantly above the $3 million threshold, meaning a larger proportion of her earnings will be subject to Division 296. The inclusion of unrealised gains could also pose liquidity challenges if she needs to sell assets to pay the tax.

Calculation of Div 296 tax:

• TSB at 1 July 2025: $5,690,000
• Earnings (7% of $5,690,000): $398,300
• TSB at 30 June 2026: $5,690,000 + $398,300 = $6,088,300
• Superannuation Earnings (for Div 296): ($6,088,300 + $0) – ($5,690,000 + $0) = $398,300
• Proportion above $3M threshold: ($6,088,300 – $3,000,000) / $6,088,300 = $3,088,300 / $6,088,300 ≈ 0.5073 or 50.73%
• Taxable Superannuation Earnings: $398,300 x 0.5073 ≈ $202,152.39
• Div 296 Tax: $202,152.39 x 15% = $30,322.86

Impact and Payment: Maria will face an additional tax liability of approximately $30,322.86. Given her SMSF holds illiquid assets, she might need to consider strategies to ensure she has sufficient cash flow to pay this tax without being forced to sell assets prematurely, especially if the earnings are largely unrealised. She could consider drawing down existing cash reserves, or making a partial withdrawal from her super (if eligible) to cover the tax.

When will Div 296 come into effect

Division 296 is proposed to come into effect from 1 July 2025. This means the first assessments for Division 296 tax would be based on the 2025-26 financial year and would be issued after 30 June 2026.

Why is the tax on super contributions over $3M controversial

Division 296 has generated considerable debate and controversy for several reasons:

Taxing unrealised gains is not the norm in Australia

A key point of contention is the inclusion of unrealised capital gains in the calculation of Division 296 earnings. In Australia, capital gains tax is typically applied only when an asset is sold (realised). Taxing unrealised gains means individuals could be liable for tax on “paper profits” that may subsequently disappear if asset values decline. This sets a precedent that could potentially be extended to other asset classes or investment vehicles in the future, causing concern for broader tax implications.

SMSFs could have liquidity challenges

For individuals with significant holdings in illiquid assets within their Self-Managed Superannuation Funds, such as direct property or unlisted investments, the requirement to pay tax on unrealised gains could create liquidity challenges. They might need to sell assets prematurely or draw on personal funds outside super to meet their Division 296 tax obligations, even if their fund is otherwise performing well. This could disrupt long-term investment strategies and potentially lead to forced sales in unfavourable market conditions.

Div 296 is not indexed

The $3 million threshold for Division 296 is not indexed to inflation. Over time, as inflation erodes the value of money and investment returns cause superannuation balances to grow, more and more Australians will likely find themselves captured by this tax, even those who might not be considered “wealthy” in real terms in the future. This lack of indexing could lead to a ‘bracket creep’ effect, bringing an ever-increasing number of individuals into the scope of this additional tax.

Additional complexity

The introduction of Division 296 adds another layer of complexity to an already intricate superannuation tax system. The calculation method, involving adjusted total superannuation balances and a proportion of earnings, requires careful attention and may necessitate additional professional advice for affected individuals, particularly those with complex financial arrangements. This adds to the administrative burden for both taxpayers and their advisors.

Potential better solutions

Critics argue that there could be more equitable and less complex ways to achieve the government’s objective of better targeting superannuation concessions. Alternatives proposed by various bodies include focusing on contributions caps, adjusting existing tax rates, or implementing a different approach to valuing superannuation balances for tax purposes.

How much additional tax will the Government get from Div 296

The Australian government forecasts that Division 296 will generate significant revenue. Initial projections indicated it would raise approximately $2.3 billion in revenue per year. However, due to the non-indexed nature of the $3 million threshold and the effects of compounding returns, it is anticipated that the revenue generated will increase substantially over time, impacting a growing number of individuals.

Are there other taxes on superannuation I should be aware of

Yes, Australia’s superannuation system has several other tax components you should be aware of:

Div 293 – Additional 15% tax if you earn over $250k

Division 293 tax is an additional 15% tax on concessional super contributions (e.g., employer contributions and salary sacrifice contributions) if your income and concessional contributions together exceed $250,000 in a financial year. This tax is levied on the portion of your concessional contributions that falls above this threshold. This effectively means that for high-income earners, the tax on their concessional contributions can increase from the standard 15% to 30%. The ATO will notify you if you are liable for Division 293 tax.

Contributions Tax (15% on concessional contributions)

Generally, concessional contributions (like employer Superannuation Guarantee contributions and salary sacrificed amounts) are taxed at a flat rate of 15% by your super fund. This is a significantly lower rate than most marginal income tax rates for individuals, highlighting the concessional nature of superannuation as a long-term savings vehicle.

Earnings Tax in Accumulation Phase (15%)

Investment earnings within your super fund in the accumulation phase (before you start drawing a pension in retirement) are generally taxed at a maximum rate of 15%. This tax is paid by the super fund.

Earnings Tax in Retirement Phase (0% up to Transfer Balance Cap)

Once you move into the retirement phase and commence an income stream (pension), earnings on assets supporting that pension are generally tax-free up to a certain limit, known as the Transfer Balance Cap. This cap is currently $1.9 million (indexed). Any amounts above this cap must remain in an accumulation account where earnings are taxed at 15%.

Non-Concessional Contributions Tax (0% if within caps)

Non-concessional contributions are made from your after-tax income and are generally not taxed when they enter your super fund, provided they are within the annual non-concessional contributions caps. Exceeding these caps can lead to significant additional tax.

Superannuation Withdrawal Tax

Generally, if you are 60 years or older and retired (or meet another condition of release), your superannuation withdrawals as either a lump sum or pension payments are entirely tax-free. If you are under 60 and withdraw a lump sum, tax may apply to the taxable component of your super, depending on your age and the amount withdrawn.