Division 296 explained: What the proposed $3 million super tax means for you

The tax introduces a new definition of ‘earnings’ based on changes in your super balance. This is very simple and is based on how retail funds calculate earnings. Here’s how it works: you take your final balance, subtract your opening balance, add any withdrawals you made, and subtract contributions. That gives you the total earnings.

Earnings = Closing Balance – Opening Balance + Withdrawals – Contributions

Let’s look at a simple example to clarify. Assume someone has a balance of $3.7 million on July 1, 2025, makes a $220,000 downsizer contribution (which is a withdrawal from the balance), and has an $80,000 pension withdrawal (which gets added back). At the end of the year, their balance is $4.64 million.

Example:

• Opening balance: $3.7m
• Contributions: $220k
• Pension withdrawals: $80k
• Closing balance: $4.64m

Earnings = $4.64m – $3.7m + $80k – $220k = $800k

This method applies across the board, even to self-managed super funds (SMSFs).

No, the 15% tax only applies to the portion of the fund that exceeds $3 million, as a proportion of the total balance. This is a common question, and it's important to understand. We'll clarify this further with some examples below, but the key takeaway is that the amount of your superannuation balance that is above the $3 million threshold matters. The less you exceed $3 million, the lower your tax bill will be. Conversely, the more money you have above that $3 million cap, the higher your tax will be. If your balance is just over $3 million, the tax proportion will be quite small.

What does the proportion signify?

Proportion calculates how much of your superannuation balance is over the $3m cap. This is important to know, because it has a significant impact on your tax bill. The higher your balance over this cap, the higher the proportion used to determine your tax liability. 

Proportion = (Total Super Balance – $3m)  ÷ Total Super Balance x 100

For example, if your Total Super Balance is $4.64 million:

• Excess over $3m = $1.64m
• Proportion over cap = 35%

Calculating your tax owed

The tax calculation is straightforward: 

Tax = Earnings x proportion x 15%

Using an earnings amount of $800,000, the tax would be calculated as follows:

$800,000 x 0.35 x 0.15 = $42,000

This means the tax is 15% of 35% of your earnings, which totals $42,000.

If your balance were instead $3.8 million, the tax would be significantly lower, approximately $25,000, due to the reduced excess above the cap.

One of the most controversial aspects of this new tax is the taxing of unrealised gains. The tax applies to earnings that are calculated based on changes in the value of assets held in your super. People over the $3m threshold will pay tax based on the value of investments that haven’t been sold. 

What does it mean to tax unrealised gains?

That means it is a tax on the movements in market values of investments and assets, not just on income generated, but on these value fluctuations that may occur. As an example, if the share market goes up that would be included as an unrealised gain. When the share market drops down that is an unrealised loss. So we're now looking at a tax regime that considers unrealised gains as a particular type of earnings.

One of the other main concerns we have about this tax is the lack of indexation. Currently, the legislation does not allow for the tax threshold to automatically increase over time. There has been a considerable amount of research on the long-term implications of this. For instance, a member of the RSM tax team created a model to analyse how this tax would affect his superannuation balance. He found that, even without making any voluntary contributions—relying solely on regular employer super contributions—his model indicated that he would still be impacted by this tax. Due to inflation, his super fund is projected to eventually surpass $3 million. However, by that time, the purchasing power of that $3m would be significantly diminished compared to today’s standards.

There has been substantial media discussion about this matter, with many suggesting that the government could later add indexation to the legislation. While it's true that they can make this change, there is no automatic mechanism in place that would trigger a periodic review. As it stands, inflation will continue to erode the value of the threshold, leaving individuals to wait for the government to choose to adjust the legislation.

We recently came across some intriguing research that explores the Greens' approach to taxation, which sets the threshold at $2 million and incorporates indexation. What’s fascinating is that, although this tax would initially affect a larger number of people, the long-term effects of indexation would actually mean that fewer individuals are impacted overall. 

So if you had doubts about the significance of indexation, hopefully this puts those doubts to rest.

A common question we receive is regarding unrealised losses: What happens if the market goes down?
Market values fluctuate, and they can decrease as well as increase. In this case, your losses are carried forward. If your 'earnings' number is negative and decreases, you won’t get a refund for that downturn. Instead, you will receive a credit for that loss, which can be used to offset future gains.

So, if you have investments that fluctuate and experience ups and downs, that carried forward loss will help you offset any future gains. Even though there is no refund, it is important to note that the loss is not gone; it remains available for you to use in the future.

If your total super balance falls below the $3m threshold and you essentially leave this taxing system, any div 296 losses will be lost and will not offset any other taxes.

Example timeline:

Year 1: Earnings of $800k → Tax bill = $42k
Year 2: Super falls → Loss of $440k
Year 3: Gains of $200k → Still under loss buffer
Year 5: Big rebound → Loss buffer used up, taxed on net gain

In year one, we paid our tax of $42,000 after earning $800,000. 

However, in year two, the share price of a stock we were heavily weighted in dropped. 

In this scenario, we initially paid our $42,000 tax in year one because things were looking good. By year two, the balance fell from $4.64 million to $4.2 million, resulting in a carried-forward loss of $440,000. I’ve ignored the impact of contributions, assuming there were none and no pensions to adjust for that year.

So, our carried-forward loss is $440,000. Let’s say that in the following years, earnings remained relatively stable, growing by just under 5% each year. 

In year three, our total super balance increased to $4.4 million. 

Using the same calculations, our earnings are determined by subtracting the previous balance. That is, $4.4 million minus $4.2 million gives us earnings of $200,000. 

Since we had a loss of $440,000 carried forward, our overall earnings are negative, totalling -$240,000, which we carry forward to year four.

In year four, we again had a gain of $200,000, which further reduces our carried-forward loss to -$40,000. 

By year five, the share price rebounded, and our balance increased to $5.8 million. We use up the remaining loss from previous years, and with the same calculations, our earnings now amount to $1.16 million.

This illustrates how the losses are applied in this situation.

What is the current state of play? This matter has been ongoing for quite some time. It was first announced in February 2023 and presented as a brief document that stated a new tax would apply to ‘earnings’ on superannuation balances exceeding $3 million. 

The legislation was drafted and successfully passed through the House of Representatives after some discussion. It was then sent for Senate review, where it was received without any issues; the Senators deemed the tax fair and had no concerns about the draft. However, the legislation became stalled in the Senate for quite a while.

The delay was due to a couple of main concerns that many of us share: the tax is based on unrealised gains, and the threshold is not indexed to inflation. During the last few sessions of Parliament, there were attempts to push the legislation through, but it did not succeed. Eventually, when the election was called, the legislation lapsed.

Now, following the unexpected election results, this legislation has resurfaced with renewed momentum.

The government has confirmed on multiple occasions that they intend to proceed with this legislation as it currently stands. Treasurer Jim Chalmers has stated that this is not new; the legislation has been available for everyone to review, and they are very clear about their plans to move forward. They do not intend to delay the previously announced start date of July 1, 2025.

However, the legislation has still not been passed into law, and we anticipate on an update in the near future. 

At this stage it is due to commence on 1 July 2025. Now, the commencement date is not the same as the due date. It means member balances will be reviewed from that date forward when calculating tax payments. 
The first tax bills will be issued after the 2026 tax return is lodged, meaning that people will likely start paying this tax in the 2026-2027 financial year.

First off, it's important to understand what your Total Superannuation Balance (TSB) is. Your TSB represents the value of all your superannuation accounts, including any pensions, accumulation accounts, defined benefits, and even old super accounts that you may have left in retail funds. All these balances are combined to give you your TSB.

The relevant tax applies if your Total Super Balance exceeds $3 million as of June 30 each year, and this is checked annually. You can move in and out of this system as your balance changes. The first test date to determine your status in the system is June 30, 2026. Just because you’re below $3 million on July 1, 2025, doesn’t mean your asset values can’t increase, which might push you over the threshold by June 30, 2026.

It's also important to note that the tax implications are based on whether your balance is above or below $3 million. For instance, If your TSB is below $3 million at 30 June, you are not liable for Division 296 tax, regardless of your balance at the start of the year or any earnings during the year.

Understanding whether you will be impacted by this tax is crucial, so make sure to stay informed about your Total Super Balance.

There isn’t a straightforward answer, but assessing how much of your earnings come from unrealised gains is a good place to start. That means, when your superannuation goes up, how much of that comes from income sources (such as dividends, bank interest or rent) and how much comes from market movements (unrealised gains).

This is an important consideration, because tax rates on income that sits inside superannuation are quite generous. When you’re not in the pension phase, you won’t pay any more than 15% income tax. 
Capital gains tax within superannuation is also advantageous. If you hold assets for more than 12 months, the maximum capital gains tax rate is 10%. This rate is significantly lower than what you might encounter outside of a superannuation structure.

So, if most of your earnings come from income, your superannuation fund may still be a more tax-efficient vehicle for holding those assets.

However, if your investments are more speculative and subject to significant fluctuations, then the div 286 tax may be more punitive. In that instance, the tax implications might be less favourable when those assets are held within superannuation compared to outside.

Ultimately, there’s no straightforward answer to which tax environment is better; and you need to consider the implications carefully before taking assets out of super and placing them into another entity. 

Also consider the cost of moving assets

The second question to consider is: what are the costs involved in transferring assets out of superannuation? Many people immediately respond with the idea of withdrawing their assets from super to bring their balance below the $3 million threshold, so they don't have to worry about paying the tax. Before you jump to that, you need to evaluate the costs of extracting those assets from super.

Assuming you are eligible to withdraw assets from your superannuation—meaning you're over 65 or retired—you may not incur tax on the withdrawal itself. However, any transfer of assets is still subject to capital gains tax (CGT) within the superannuation fund. This means you will trigger a significant upfront cost when transferring assets out, along with potential transfer duties if the assets include property.

One aspect we've begun to model is the upfront costs associated with asset transfers and how many years you've held those assets in super. This analysis can help determine how long it takes to recover the upfront costs incurred during the transfer process.

Example:

Let’s use an example of a superannuation fund with a total balance of $5.5 million. This includes a property valued at $3 million, which has a cost base of $1.2 million. This means the property was purchased for $1.2 million. It is now worth $3 million, so if we choose to transfer this asset out of the superannuation fund, the market value of $3 million will be considered our sale price – even though we’re only transferring the asset, not actually selling, the market value gets treated as a sale price, which means we have a capital gain.

In this particular case, the member has a pension balance that started last year and is currently worth $2 million. The remaining $3.5 million of their super is in their accumulation balance. This distinction is important because the assets supporting the pension are not subject to income tax, whereas the amounts in the accumulation balance will incur income tax. As a result, not all of the super fund is tax-free, meaning the accumulation part of the super fund will pay income tax on any capital gains.

The individual in question says, "I don’t want to remain in this tax regime. I believe the property will increase in value in the future, and I would prefer to transfer it out." Consequently, they decide to transfer the $3 million property to themselves. This action leaves them with a remaining balance of $2.5 million and allows them to fall outside of Division 296 tax regulations. But what was the cost of this transfer?

We have omitted transfer duty or stamp duty from this example because it does vary from state to state. Just keep that in mind, if you are in a state with a duty regime that there will be additional costs for transfer duty or stamp duty to consider, on top of the example below. 

• Capital Gains; $3 million - $1.2 million = $1.8 million

• Tax on gain: $1.8 million - $600,000 (1/3 discount) = $1.2 million x 15% = $180,000

However, the $2 million sitting in the pension balance incurs no tax. So, as 36% of the super fund is tax-free, we can only tax the remaining 64% of the fund. 64% of $180,000 is $115,200. So it would cost $115,200 to transfer that asset out of our super. 

So now we have to consider whether this restructure is saving money. Or rather, how long would it take to recoup the cost of transferring the asset? 

It is important to remember that we would have to pay this tax liability as an upfront cost when we move the asset. The ongoing tax liability may only amount to $10,000 per year – meaning it would be 15 years before we started to save money on tax. You must consider if the upfront cost is something you’re willing to bear vs. a much smaller tax bill spread over many years. It is a big decision. 

The third key thing to consider is if the asset is outside of super what do you do with it? Are you planning to sell it or pass it to the next generation? These are the things that need to be considered because holding it outside of super may give you a very big capital gains tax bill in 15 years time. 
There are a lot of variables to consider here, and many of them are based on projections for what will happen in the future. 

What is the best vehicle for you to have these assets in – trust, company, or personal? It could be you want to use these assets as part of an intergenerational wealth transfer. This opens a whole new conversation around the tax implications outside of super as well. 

As you can see, there's no simple answer as to what should you do. Your instinctual response might be to cash it out of super – but there's actually some other things that need to be factored in as well before you make that decision. This needs to be carefully considered based on your specific circumstances.

One question we are constantly asked is what are the key dates to be aware of? At this stage, the legislation will apply from 1 July 2025, but the first key testing date is 30 June 2026. It is important to consider your specific issues before this date.

If you have any concerns about this tax, please do reach out to us. We're more than happy to talk to you and to address your specific concerns.