Division 296 Tax Has Arrived: What You Need to Know
If you have built a significant amount of wealth inside superannuation, you have probably heard about the new Division 296 tax. While it has generated plenty of headlines, it's also created plenty of confusion.
The good news is that for most Australians, nothing changes. Division 296 only affects individuals with more than $3m in total within the superannuation environment. Even if your balance exceeds this amount, it doesn't automatically mean your entire super balance will be taxed more heavily.
Understanding how the new rules work before making any decisions can help you avoid costly mistakes and ensure your retirement savings continue working as efficiently as possible.
What is Division 296?
Division 296 is an additional personal tax, not a tax levied on your super fund itself.
From 1 July 2026, individuals with total super balances above certain thresholds may pay extra tax on the proportion of their taxable super earnings that relates to the amount above those thresholds.
For the 2026–27 financial year:
Super balances up to $3 million are not affected.
Earnings attributed to the portion of your balance above $3 million attract an additional 15% tax.
Earnings attributed to the portion above $10 million attract a further 10%, meaning an additional 25% tax applies to that part.
Importantly, this sits on top of the existing tax treatment inside super. Super earnings remain taxed at up to 15% in accumulation phase and generally tax-free in retirement phase, with Division 296 applying separately to eligible individuals. The legislation also provides for the thresholds to be indexed over time in line with inflation rather than remaining fixed indefinitely.
Who could be affected?
Division 296 is based on your total super balance across every super account you own, not on each individual fund.
Your balance includes:
Balances within accumulation phase, including Transition to Retirement accounts.
Account-based pension income streams.
Defined benefit interests.
For example, imagine you have:
$2 million in an account-based pension
$800,000 in an accumulation account
$400,000 in another super fund.
Although none of these accounts individually exceed $3 million, together they total $3.2 million, meaning you could fall within the new rules.
The Australian Taxation Office (ATO) will combine information from all your super funds before determining whether Division 296 applies.
How is the tax calculated?
One of the biggest misconceptions is that once your balance exceeds $3 million, everything is taxed at the higher rate.
That isn't the case.
Division 296 only applies to the proportion of your super earnings that relates to the amount above the threshold.
For example, suppose your total super balance is $4 million.
That means 25% of your balance sits above the $3 million threshold.
If your taxable super earnings for the year are $200,000, your additional Division 296 tax would broadly be:
25% × $200,000 × 15% = $7,500
The ATO will calculate the amount after receiving earnings and balance information from your super funds. The first assessments for the 2026–27 financial year are expected to be issued during 2027–28. Individuals can generally choose to pay the liability personally, release the money from an eligible super account, or use a combination of both.
Why 30 June 2027 is an important date
The first year of Division 296 includes a valuable transitional rule.
For 2026–27, only your total super balance on 30 June 2027 is tested.
This means that if you have met a condition of release and are eligible to withdraw money from super, reducing your balance to $3 million or less before 30 June 2027 could mean Division 296 doesn't apply in the first year.
From 2027–28 onwards, however, the rules become stricter. The ATO will generally use whichever is higher - your balance at the beginning or the end of the financial year. This means withdrawing money later may not eliminate the tax if your balance exceeded the threshold at the start of the year.
It's not always worth withdrawing money
While reducing your super balance may sound like an easy solution, it's rarely that simple.
Taking money out of super could create other consequences, including:
Triggering capital gains tax if investments need to be sold.
Losing tax advantages that holding money in superannuation provides.
Limiting your ability to recontribute money later as a result of contribution rules (i.e. Total Superannuation Balance Thresholds and age restrictions).
Exposing future investment earnings to higher personal tax rates.
For many people, keeping investments inside super may still deliver a better long-term outcome, even after accounting for Division 296. That's why the decision should always consider your complete financial situation rather than focusing solely on avoiding one tax.
Realised gains—not paper profits
One of the most significant improvements from the original proposal is how earnings are now measured.
Earlier drafts suggested unrealised investment gains - such as increases in the value of shares or property that hadn't been sold - could be taxed.
That is no longer the case.
Division 296 now broadly applies to realised taxable earnings. In simple terms, an investment generally needs to be sold before the capital gain is included for Division 296 purposes.
This makes decisions around when to sell investments, how frequently portfolios are rebalanced, and where assets are held much more important for individuals with larger super balances.
Additional considerations for SMSFs
Self-managed super funds (SMSFs) face some extra complexity.
Trustees must calculate Division 296 earnings for the fund and allocate those earnings between members using the prescribed methodology. In multi-member SMSFs, this allocation may not necessarily follow which member owns each investment, meaning administration becomes more involved.
Some SMSFs may also require actuarial certificates in situations where they weren't previously needed.
Another important decision is whether to elect to reset the cost base of eligible assets to their market value as at 30 June 2026 for Division 296 purposes. This election applies to all relevant assets within the fund and cannot be reversed. It may benefit funds with significant unrealised gains but could disadvantage those with unrealised losses, so careful advice is essential before making the decision.
What should you do now?
If your total super balance is approaching or already exceeds $3 million, now is the time to review your position rather than waiting until an assessment arrives.
A discussion with your financial adviser and or accountant should include:
Confirming your total super balance across every superannuation fund that you have.
Estimating any future Division 296 liability.
Considering whether withdrawing money form superannuation is appropriate.
Reviewing potential balance equalisation strategies and whether superannuation can be evenly spread between spouses.
Planning the timing of significant asset sales (i.e. investment properties within an SMSF).
Assessing whether all retirement savings should remain within superannuation.
Consider whether alternative investment structures may be more appropriate.
For SMSF’s, determining whether the cost-base election is beneficial.
For many Australians with larger balances, superannuation is still likely to remain one of the most tax-effective places to invest for retirement. The key is making informed decisions based on your overall retirement strategy rather than reacting to a single tax change.
Final thoughts
Division 296 represents one of the biggest changes to superannuation taxation in recent years, but it doesn't mean everyone with a balance above $3 million should immediately restructure their retirement savings.
Instead, understanding how the rules work, knowing the significance of 30 June 2027, and carefully modelling the long-term financial impact of any strategy will usually produce better outcomes than making rushed decisions.
With proper planning, many investors can continue to use superannuation effectively while adapting to the new rules.
Note: Division 296 legislation is now in force from 1 July 2026. Some administrative guidance, particularly around certain defined benefit interests and operational reporting, may continue to evolve as further ATO guidance becomes available.
Disclaimer
The information provided in this article is general in nature and has been prepared without considering your personal objectives, financial situation, or needs. It does not constitute financial advice. Before making any decisions, you should assess its appropriateness and seek professional financial advice tailored to your circumstances. Additionally, ensure you review the relevant Product Disclosure Statement (PDS) before deciding on any financial product.