Division 296 demystified and examples of its potential impact

While the Division 296 tax is still yet to be legislated, it’s looking likely the tax will be introduced. For individuals who may be impacted by the change, it’s critical to understand how different scenarios might play out and what they should consider. 

Key components of Division 296

The proposed Division 296 tax legislation includes several critical components:

1. Tax on unrealised gains

Unrealised gains refer to the increase in the value of investments that have not been sold. Taxing these gains raises several issues, including the potential for individuals to pay tax on ‘imaginary profits’ if the value of their investments subsequently declines.

2. No refund for negative earnings

If an individual experiences negative earnings or their TSB falls below $3m, no refund is available for Division 296 tax paid in a prior year. Instead, losses can be carried forward to offset future Division 296 earnings. In some instances, these losses may never be utilised.  

3. Calculation methodology: 

Step 1: Calculate the earnings, defined as the movement in the individual's total superannuation balance adjusted for any withdrawals and net contributions.
Step 2: Determine the proportion of earnings attributable to the balance above $3 million.
Step 3: Apply a 15 per cent tax rate to the earnings amount derived from the previous steps.

4. Individual assessment

The tax is assessed per individual, aggregating all their superannuation accounts. For those with a Self-Managed Superannuation Fund (SMSF), each member’s balance is assessed individually.

5. Payment of Tax

• The tax is assessed to the individual, not the superannuation fund
• The Individual will have the option to pay the tax personally or elect to have the payment released from the superannuation fund.

How does this look in different scenarios?

To illustrate the potential impact of Division 296, consider the following case studies:

Case study 1

Anne has a superannuation balance of $3.2m at the end of the financial year and no contributions or withdrawals. Her balance increases to $3.4m the following year. The tax liability is calculated based on the proportion of earnings above $3m, resulting in a relatively modest tax amount. The following steps to calculate this are:

Case study 2

Bob has a superannuation balance of $9m, which increases to $9.5m the following year. The tax liability for Bob is significantly higher due to the larger proportion of earnings above the $3m threshold. The following steps to calculate this are:

Case study 3

Gail has a superannuation balance of $5m, which increases to $5.3m the following year. Gail makes concessional contributions of $30,000 and takes pension withdrawals of $150,000. The following steps to calculate this are:

Case study 4

John has a superannuation balance of $3.2m, which decreases to $2.9m the following year. John takes pension/lump sum withdrawals of $400k. The following steps to calculate this are:

Planning considerations

With the tax expected to apply for the 2026 financial year, even with a start date of 1 July 2025, there is still time to assess any plans and implement strategies prior to 30 June 2026 to reduce the impact of the Division 296 tax. 

It’s critical to wait until the final legislation is passed rather than withdrawing funds prematurely in anticipation of the tax, as re-contribution may not be possible if the legislation does not proceed as expected. 

Selling investments prematurely will only trigger capital gains tax consequences, it will not impact the amount of Division 296 tax, which is based on the balance movement.

For many, superannuation will remain a tax-effective structure even with the new tax. For others, it may be an opportunity to review their current and alternative investment vehicles to identify the most tax effective strategies moving forward.

We’re here to help

Division 296 represents a significant change for individuals with high superannuation balances. It is crucial for individuals to seek tailored advice and plan accordingly to navigate these changes and the implications for their superannuation and wealth strategies. If you’d like to discuss your current superannuation strategy, please reach out to one of our experts today.

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_{The above information is provided as an information service only and, therefore, does not constitute financial product advice and should not be relied upon as financial product advice. None of the information provided takes into account your personal objectives, financial situation or needs. You must determine whether the information is appropriate in terms of your particular circumstances. For financial product advice that takes account of your particular objectives, financial situation or needs, you should consider seeking financial advice from an Australian Financial Services licensee before making a financial decision in relation to any of the matters discussed.}