Section
Division 296 Tax Update
On Wednesday, 11 February, Treasurer Jim Chalmers introduced the Superannuation (Building a Stronger and Fairer Super System) Imposition Bill 2026 into Parliament.
The Bill has not yet passed the Lower House. If it does, it will require the Greens’ approval in the Upper House.
The Exposure Draft was released in late December, with consultation closing on 16 January 2026. The current Bill appears largely unchanged from the draft, aside from further clarification around the operation of Division 296 Tax.
If passed, the effective start date will be 1 July 2026. This means the tax would apply from the 2027 financial year onwards.
Overview of Division 296 Tax
Superannuation balances under $3 million are not impacted.
Super funds will continue to pay their normal tax, generally at 15 % on earnings. However, due to the benefits of franking credits and Exempt Current Pension Income (for those in receipt of an income stream), the effective tax rate is often lower.
The additional Division 296 Tax applies to individuals whose Total Super Balance exceeds certain thresholds.
| Total Super Balance | Additional Tax Rate on Proportion above the Large & Very Large Threshold | Indexation(CPI increments of) |
|---|---|---|
| Under $3 million | Nil | Nil |
| $3 million – $10 million (Large) | 15% | $150,000 |
| Over $10 million (Very Large) | 25% | $500,000 |
From 30 June 2027 onwards, if a person’s Total Super Balance just before the start of the year or at the end of the year, exceeds the relevant threshold and there are superannuation earnings, Division 296 Tax will apply.
It is worth noting that in the first year, only the closing balance will count towards the thresholds, giving those who have met a condition of release the opportunity to remove monies from superannuation.
The ATO will determine the Division 296 Tax assessment and levy it on the individual. The individual may elect to release funds from super or pay the tax personally. Payment is due within 84 days of the notice of assessment.
A key concern centres around market volatility. A member could be subject to Division 296 Tax in one year due to valuation increases at 30 June, even if values subsequently decline. Furthermore, as this is the closing balance for one year, it now becomes the opening balance in the following year, meaning the member will be caught over two financial years, even though the market could have plummeted during the year.
Important Definitions
Total Super Balance (TSB)
All Australian superannuation interests are counted toward an individual’s TSB for Division 296 Tax purposes, including:
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Each member’s super interest
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Super death benefit income streams, including reversionary and the commencement of a death benefit pension
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A non-member spouse entitlement under a family law split
Limited Recourse Borrowing Arrangements are excluded for Division 296 Tax purposes, despite ordinarily being included when calculating TSB for contribution caps.
TSB is based on the “withdrawal benefit”, being the amount payable if the individual had the right to cause their superannuation interests to cease at that time.
Treatment on Death
A positive outcome of the Bill outlines that a member’s TSB is taken to be nil after death.
Therefore, in the year of death, if the opening balance exceeds $3 million or $10 million, the dependant or estate may still be subject to Division 296 Tax for that year only. As the balance is nil at year end there will never be any future Division 296 Tax assessment after the year of death.
In effect if assets are sold in the year after death to pay out a death benefit, which triggers a capital gain, that gain will not be subject to Division 296 Tax, as it is not the year of death.
How “Super Earnings” Are Calculated
Your superannuation earnings are relevant when determining the application of Div 296 Tax and must be greater than zero.
Division 296 fund earnings are calculated as follows:
Taxable income always includes grossed-up franking credits and foreign tax credits. This approach raised concerns during consultation, as it effectively results in tax on tax.
The legislation has clarified that this treatment is intentional.
At the super fund level:
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Franking and foreign tax credits are applied against the fund’s overall tax liability.
For Division 296 Tax purposes, there is a twofold impact:
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Taxable income is grossed up and Division 296 Tax applies to the gross amount.
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Any refund of franking credits increases the member’s superannuation interest, which forms part of their TSB.
Modified Net Capital Gain for Division 296 Tax
For Division 296 Tax calculations:
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Certain CGT concessions ordinarily available to super funds are disregarded.
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Exempt capital gains as a result of receiving an account-based income stream or asset segregation, are added back.
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The one-third CGT discount continues to apply for assets held longer than 12 months.
Transitional Arrangement
In the first year, members may elect to reset the cost base of assets to their market value as at 30 June 2026.
This election:
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Applies to all assets held at 30 June 2026
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The choice must be made by the trustee in the approved form no later than the date the funds income tax return is due for lodgement for the financial year ended 30 June 2027.
- Is irrevocable
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Requires careful record keeping
Valuation and Liquidity Considerations
Annual market valuations will become critical. This creates practical challenges, particularly for:
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Start-up companies
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Mortgage or loan investments
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Venture capital and R&D private companies
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Other unlisted investments
- Investments subject to high volatility
Trustees will need to consider both:
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Liquidity, if funds are required to release monies to pay the Division 296 Tax and
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The ability to obtain reliable annual market valuations
We may see trustees reconsider exposure to certain illiquid asset classes. As well as assets that are high income yielding.
Final Comments
The application of Division 296 tax is complex and remains subject to parliamentary approval.
At Slomoi Immerman Partners, we are closely monitoring the Bill’s progress. It is not expected to be brought back to the Lower House until Parliament resumes sitting in March.
We will continue to keep clients informed. If you would like to discuss how these proposed changes may affect your position, please contact our office.
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The above summary is intended to be general in nature. Should you believe that any of the above matters may be relevant to you or your Group’s particular circumstances, please discuss the specific details with your Slomoi Immerman Partners adviser.
