Division 296 - Overview

The proposed start date will be 1 July 2025 and the tax, tentatively called Division 296 Tax, will first apply to the 2025/26 financial year. The two key features of the proposed tax are:

• it operates at the member level

• it is based on the increase in the total superannuation balance of the member during the financial year

As the tax operates at a member level, assessments of the tax will be issued to the member and not to the super fund.  The member can either pay the assessed tax personally or have the tax paid by their super fund on their behalf (with the super fund debiting the member’s account with the payment).  The operation of the new tax will be very similar to the current operation of Division 293.  Consequently, the ATO will initiate the tax assessments, the member will not be required to lodge any returns in relation to the tax.

As the tax is based on the increase in the total superannuation balance (and not actual, realised earnings), the tax will apply to both realised and unrealised capital gains and also LRBA repayments (if LRBA is within a self-managed superannuation fund).

Since the first announcement of Division 296 Tax a Consultation Paper was released on 31 March 2023.  The following explanation is based upon that Paper.

 Why call it Division 296 Tax?

Currently the tax has no name.  We have assumed that the relevant taxation provisions will have to be included in Part 3-30 of the Income Tax Assessment Act 1997 and Divisions 290, 291, 292, 293, 294 and 295 are currently taken.  The next currently taken division is Division 301.  This means that numbers 296 to 300 are available for use.  Consequently we have chosen the first available division number – which is Division 296.

 Does Division 296 Tax only affect older members?

The application of Division 296 Tax is not predicated on either age or retirement status.   If a young member of a superannuation fund who is in accumulation phase has a total superannuation balance in excess of $3m, then that young member will be affected by Division 296 Tax.

The application of Division 296 Tax is only indirectly affected by age as larger super balances are generally held by older members as it has taken a number of years of contributions and earnings to reach or exceed the $3m threshold.

 How it will operate?

Division 296 Tax will be determined in a three-step process:

1. Determine the increase in the total super balance of a member during the financial year. This increase will be treated as the total earnings of the member for the financial year for the purposes of Division 296.

2. Determine the amount of total earnings which is attributable to the portion of super balance in excess of $3m.

3. Apply the 15% tax rate to the amount of total earnings attributable to the super balance in excess of $3m.

Example

John has a Total Superannuation Balance (TSB) as at 30 June 2025 of $3.2m and a TSB of $4.5m at 30 June 2026.  Additionally, he made $110,000 of non-concessional contributions to his super fund and withdrew $200,000 as benefit payments (it is irrelevant whether the benefit payments are pension payments or lump sum payments).

1. Determine John’s Division 296 “earnings” over the financial year

The taxable increase in the TSB for John for the year ended 30 June 2026 will be:

$4.5 m - $3.2m + $200,000 - $110,000 = $1,390,000

That is TSB at year end less TSB at the start of the year.  Additionally, “benefit payments” are added in and non-concessional contributions excluded (taken off).

 Why include benefit payments?  If benefit payments were not included in the Division 296 earnings amount, Division 296 Tax could be avoided by the simple practice of cashing out sufficient super to match the increase in the TSB.  One consequence of including benefit payments is the Division 296 Tax will apply to both benefit payments which are taxable in the hands of the member as well as benefit payments which are tax exempt in the hands of the member.

 Why take off contributions?  Contributions are not earnings but capital injections into the super.  If the contribution is not assessable in the hands of the super fund trustee, the face value of the contribution is used.  If the contribution is assessable in the hands of the super fund trustee, then 85% of the face value of the contribution will be used. 

1. Amount of Division 296 earnings attributable to excess TSB

For this purpose, excess TSB is the amount of TSB at year’s end which is in excess of $3m.

The amount of Division 296 earnings attributable to the excess TSB is determined by the proportion of the TSB (at years’ end) in excess of $3m compared to that TSB.  For example if the proportion of the TSB at year end in excess of $3m was 20%, then 20% of the Division 296 earnings would be taxable.

Returning to John.  As at 30 June 2026, the excess portion of John’s TSB is $1.5m (ie $4.5m -$3m).  The proportion of John’s Division 296 earnings attributable to the excess portion will be 1/3rd (ie $1.5m /$4.5m).

Consequently, the taxable portion of John’s Division 296 earnings will be 1/3rd of $1,390,000 which is equal to $463,000 (rounded down to the nearest $1,000).

1. Division 296 Tax

The tax will be 15% of the Division 296 earnings attributable to the excess TSB.  In John’s case the Division 296 Tax will be:  15% of $463,000 = $69,450.

 Payment

As John has attained age 65 (or any other unrestricted release condition) he could either pay the Division 296 Tax assessment personally, or direct his super fund to pay the assessment on his behalf (with the fund debiting his super account with the tax bill).

If John had not attained age 65 (or otherwise not satisfied an unrestricted release condition) he would not have the option of paying the Division 296 Tax personally:  he would have to pay the Division 296 Tax by directing his super fund to pay the assessment on his behalf (with the fund debiting his super account with the tax liability).

 What if John had multiple superannuation interests in various funds?

This would make no difference as the TSB is the aggregate of the balances of all his superannuation interests; and in determining his “benefit withdrawals” it will be the aggregate of all benefit withdrawals.  Similarly with contributions.  The only difference between having an interest in one fund as against interests in two or more funds is that John would be able to select which fund will pay any Division 296 Tax if John decides not to pay the Division 296 Tax personally.

 What if John had a retirement pension?

The value of the retirement phase pension would be taken into account in determining John’s TSB.  The value of all pension account balances (whether retirement phase or not) at the end of the financial year would be taken into account in determining the TSB as at the end of the financial year.

The $3m cap is not in addition to the transfer balance cap, which is currently $1.7m but from 1 July 2023 will be $1.9m.

 What if John had only one super interest which is entirely in retirement phase?

It could be the case (though unlikely) that John had only one superannuation interest which has a TSB greater than $3m (for example John started a retirement phase pension – his first with $1.9m on 1 July 2023) and, by dint of good returns and minimal drawdowns, the pension account balance has increased to $3.0m on 30 June 2025 and then to $3.5m on 30 June 2026.

Division 296 would still apply to John even though his entire pension balance is in retirement phase.  If John had made pension payments of $200,000 during the financial year ending 30 June 2026, he would have a Division 296 Tax of $14,700.

The calculation is as follows:

Step 1:  Division 296 earnings

$3.5m -$3m + $200,000 = $700,000

Step 2:  Proportion of Division 296 earnings due to excess TSB)  

14% (rounded up) ie ($3.5m - $3m)/$3.5m

Step 3:  Division 296 Tax

$14,700 = 15% x 14% x $700,000

 TSB transcends $3m during financial year

If John’s TSB on, say, 30 June 2025 was $2.8m and his TSB was $3.2m on 30 June 2026 with no withdrawals or contributions, his Division 296 Tax would be calculated as follows:

Step 1:  Division 296 earnings

$3.2m -$3m = $200,000

Step 2:  Proportion of excess Division 296

($3.2m - $3m)/$3.2m = 6.25%

Step 3:  Division 296 Tax

15% x 6.25% x $200,000 = $1,875

 TSB decreases below $3m during financial year

If John’s TSB on 30 June 2025 was $3.4m and his TSB was $2.8m on 30 June 2026 with no withdrawals or contribution, then the Division 296 calculation would be:

Step 1:  Division 296 earnings

$2.8m -$3.4m = -$600,000

As the Division 296 earnings are negative steps 2 and 3 are not engaged. 

In this case John is not liable for Division 296 Tax in respect of the 2025/26 financial year as his Division 296 earnings is negative.  The negative earnings will be carried forward to the next financial year.  It is not known whether the carried forward is indefinite or subject to a time restraint.  Presumably, carried forward (negative) Division 296 amounts will be applied in the order in which they occurred.

 TSB decreases below $3m in year 1 below $3m and then increases above $3m in year 2

Let’s assume the TSB at the start of financial Year 1 is $3.3m and at the end of that year it is $2.8m.  Neither contributions nor benefit payments were made during the year.  Then in Year 2 the TSB at year end is $3.7m (again with no contributions or benefit payments).

For Year 1:           The TSB earnings are negative $500,000 ($2.8m less $3.3m)

As the earnings are negative no Division 296 tax arises in Year 1

 For Year 2:            The TSB earnings are positive $900,000 ($3.7m - $2.8m)

The negative Division 296 earnings from Year 1 are carried forward to Year 2, consequently, the net earnings for Year 2 is $400,000 ($900,000 less the carried forward of negative earnings)

The proportion of Division 296 earnings for Year 2 is:

($3.7m - $3.0m)/$3.7m which is about 19%.  

Division 296 Tax for Year 2 is:

15% x 19% x $400,000 = $11,400

 Will rolling back a pension to accumulation phase have any impact on the Division 296 Tax?

Assuming the roll back is properly reported to the ATO, rolling back to accumulation phase will have no impact on the TSB.  However, if the rollback is not correctly reported to the ATO, the ATO calculation of the TSB for John will be incorrect (on the higher side) as the rolled back amount may be counted twice.

Whether this is achieved by ignoring such transactions (so that the rollback is not a withdrawal and the rollover is not a contribution) or by netting off such transactions (rollback as a withdrawal which is offset by the transfer payment being treated as a contribution) is not known.

 Will rolling over superannuation amount to another fund have any impact on the Division 296 Tax?

Assuming the rollover is correctly reported to the ATO, rolling over to another superannuation entity will have no impact on the TSB.  If not correctly reported, there will be a possibility that the TSB will be incorrect as the rolled over amount will be counted twice.

 Will the timing of benefit withdrawals or contributions have any impact on the Division 296 Tax?

In general, no.  Timing of the transaction will have no direct impact on the Division 296 Tax.  This is because it is the aggregate (irrespective of when the transaction occurred) of the withdrawals/ contribution and there is no time weighting.

However, there may be an indirect impact.  If withdrawals are made at the start of the financial year, presumably there will be less earnings than would otherwise be the case and so the TSB at the end of the financial year will be lower than it would otherwise have been (all other things being equal).  If contributions are made at the end of the financial year, then the earnings on those contributions will be minimised and so the TSB at year end will be less than it would otherwise have been (all other things being equal). 

 Is there any sharing of the $3m cap between spouses?

Unfortunately, no.  If Bill has a TSB of $4m and Jill has a TSB of $1m, there is no averaging of the two balances to produce a result that neither triggers Division 296 (as each averaged TSB is $2.5m).  Bill’s TSB is in excess of $3m so he will be subject to Division 296.

 Is the $3m threshold indexed?

There is no mention that the Division 296 threshold will be indexed.  It may be adjusted from time to time.  If the $3m threshold is not indexed (or is not regularly adjusted), it will over time cause Division 296 tax to affect an increasing proportion of the superannuation population.

 Are earnings on balances in existence before 1 July 2025 exempt from Division 296?

In short, no.  Consider Paul.  He has his own SMSF, called SMSF-A, in which he has a superannuation balance of $3.1m as at 30 June 2025.  On 1 July 2025 he makes a $330,000 non-concessional contribution to a new fund, being SMSF-B.

In determining Paul’s Division 296 Earnings for 2025/26, his balances in both SMSF-A and SMSF-B will be counted.  The fact that his balance in SMSF-A predates the introduction of Division 296 is irrelevant.

 What about investment losses?

Investment losses will have an impact on Division 296 Tax as the investment loss will reduce the TSB the value at year’s end.

 Does the 1/3rd CGT discount for long term capital gains reduce Division 296 Tax?

Based upon the information released to date, the CGT discount for long term capital gains will not automatically reduce the “earnings” to which Division 296 Tax applies.  This is because the CGT discount is relevant to the determination of the super fund’s tax liability if and when there is a CGT event in relation to a fund asset.  The CGT discount is not directly relevant in the determination of a member’s liability to Division 296 Tax.

The CGT discount will affect the “earnings” to which Division 296 applies if assets are regularly revalued and value net of tax (assuming there had been a notional disposal) is credited to member accounts.  Such regular revaluations are not the norm for SMSFs, given the cost and systems required to undertake such regular revaluations and to date, the lack of requirement for such net of tax valuations.

The introduction of Division 296 Tax may spark an interest in SMSFs for valuing on a net of tax basis, though the costs of doing so (annual valuations, new systems etc) may be significant.

 Does asset segregation have any effect on Division 296 Tax?

In this context segregation means holding an asset exclusively for one or more members but not all members of an SMSF.  The segregated asset could be supporting retirement phase interests or accumulation interest.

Segregating an asset will have an impact on the determination of the TSB of a member.  The value of the asset will directly affect the TSB of the members for whom the asset is held in proportion to the member’s economic interest in the asset.

 What if the member completely rolls-out of super before year end?

The design logic of Division 296 Tax is that the member will still be liable to Division 296 Tax in respect of the financial year during which the member exits the superannuation system.

Consider Karen.  Now that she has attained age 65 during the 2025/26 financial year she has decided to relocate overseas.  Her TSB on 1 July 2025 was $3.1m and she completely rolls out her super on 31 December 2025, when the TSB is $3.3m on her 65th Birthday.  She has been entirely in accumulation phase.

Presumably, in this situation Division 296 Tax will apply by treating the period 1 July 2025 to 31 December 2025 as if it were a full financial year.

Consequently, the calculation of Division 296 Tax would be as follows:

Step 1:  Division 296 Earnings

$3.3m - $3.1m = $200,000

Step 2:  Proportion of Division 296 Earnings

($3.3 -$3m)/$3.3m = 9% (rounded down)

Step 3:  Division 296 Tax

15% x 9% x $200,000 = $2,700

Karen will be issued with a Division 296 Tax assessment for $2,700 and as she no longer has any super accounts, Karen must pay the tax herself.

 What is the impact of death of a member have on Division 296 Tax?

Presumably, Division 296 Tax will still apply.  Most likely Division 296 will apply until the death benefit is allocated (whether as a lump sum payment or used to commence a pension) and for each intervening financial year or part financial year between the date of death and the date of benefit allocation.

If Division 296 Tax is payable, again presumably, the assessment will be issued in the name of the estate of the deceased member with the executor having the option of either paying the assessed tax as an estate expense or having one or more of the deceased super accounts pay the tax.

 Will insurance proceeds form part of the TSB?

In this context, the insurance proceeds would arise from a term life insurance arrangement.  Whether the insurance proceeds are treated as the realisation of an asset held exclusively in respect of the deceased member or treated as a contribution for the deceased member, the Division 296 Tax outcome will be the same.

The insurance proceeds will be included in the TSB of the deceased member.  Given the nature of insurance proceeds, possibly the implementing legislation will only treat the life policy as having a value for Division 296 purposes if and when the insurance proceeds are received by the super fund trustee.

 Original Source: https://supercentral.com.au/resource-centre/newsletters/supercentral-news/division-296/