If your super balance is $3 million or more, there is a very high chance of paying more tax next year. And if it is less, you might be caught up paying more tax one day because the $3 million is not indexed for inflation, or if the Greens get their way, the $3 million will be reduced to $2 million.
The so called “Division 296” tax has been around for a while. In fact, the legislation has been sitting with the Parliament for almost two years. But because the LNP Coalition did so badly in the election and lost a couple of Senate seats, the balance of power in the Senate shifted. Whereas before the Government needed the support of the Greens plus a couple of independent Senators (e.g. David Pocock, Jacqui Lambie) to make it law, they now just need the Greens. And because the Greens are onboard (except they want the balance to be $2 million rather than $3 million), it is almost certain to pass.
The tax will start in the 25/26 financial year. Due to design issues, unrealised capital gains will also get taxed. The latter is causing considerable disquiet to people with large, illiquid assets in their SMSF (business properties, family farms etc), and is prompting a significant public backlash. But the Government has the numbers and, at this point in time, seems to be holding firm.
There are strategies that can be employed to mitigate the impact of the tax. Below are five tips but before that, I’ve done a review of how the tax will work in practice.
How the new super tax works
The key date next year is 30 June 2026. If your total superannuation balance (TSB) is $3 million or more, you are a candidate for the tax. If under $3 million, you won’t pay Division 296 tax.
Your total superannuation balance is all the monies you have in super. This includes account-based pensions and funds in accumulation, from all your super funds. It excludes limited recourse borrowing arrangement amounts.
The rate of tax is 15%. This is applied to the proportion of an individual’s super earnings attributable to the balance over $3 million. The first step is to work out the proportion over $3 million.
This is calculated via the following formula:
Total super balance at end of year (TSB) minus $3 million X 100
Total super balance at the end of the year
Let’s take an example
If your TSB on 30 June 2026 is $3.5 million, then the proportion is:
$3.5 million – $3 million x 100 = $500,00
$3.5 million
$500,000
$3.5 million = 14.29%.
The next step is to determine the amount of superannuation earnings for the year. This is done by comparing the closing total super balance at 30 June 2026 with the previous year’s total super balance (at 30 June 2025) and adjusting for withdrawals and contributions.
Your adjusted total super balance at 30 June 2026 is the sum of your total super balance plus withdrawals, less contributions. Withdrawals include pension payments, lump sum withdrawals and amounts transferred to a spouse under spouse contribution splitting arrangements. Contributions are concessional and non-concessional contributions, with the former adjusted for the tax that’s paid by the super fund (i.e. 85% of the actual contribution).
So, Super earnings = Current year adjusted total super balance – Previous year total super balance
For example, your total super balance at 30 June 2026 is $3.5 million and your total super balance at 30 June 2025 is $3.1 million. During the year, you withdrew $100,000 from your account-based pension and made a concessional contribution of $30,000. (85% of the $30,000 which is $25,500 is counted).
Superannuation earnings = ($3.5m + $100,000 – $25,500) – $3.1m = $474,500
Because the calculation of earnings is based on a change in balances, and these are calculated by considering the market value of each individual asset, unrealised gains (within the year) get counted in.
Next, division 296 tax is calculated.
This is super earnings relating to the portion of the total super balance over $3m, taxed at 15%.
In the example above, it is: $474,500 X 14.29% X 15% = $10,170.91.
This division 296 tax of $10,170.91 is payable within 84 days of assessment and can either be paid directly by the superannuant (i.e. from their own monies) or by release of monies from within the super fund.
There are a couple of additional tweaks.
If the previous year’s total super balance is less than $3m, it is deemed to be $3m for the calculation of the earnings (this results in a lower amount of earnings and Division 296 tax). Of more potential importance are negative earnings. These can be carried forward to reduce the super earnings in future years.
5 TIPS TO MINIMISE THE NEW SUPER TAX
TIP 1: Reduce the balance below $3 million.
If you have liquid assets and are permitted to take money out of super (i.e. meet a condition of release, such as being over 65), this is an obvious strategy. Doing it prior to 30 June 2025 is very safe, doing it prior to 30 June 2026 should be ok. While the Government might consider anti-avoidance measures, I think it would be very hard to argue that you aren’t entitled to withdraw your own money.
There are two obvious downsides to this strategy:
- Selling assets potentially crystalises capital gains tax (the maximum effective tax rate should be 10%, probably lower).
- More importantly, what other structures allow you to invest where the maximum tax rate is 30%? Even with Division 296 tax, superannuation is going to remain a tax effective investment vehicle.
If you have large, relatively illiquid assets, such as a family farm or business property, selling assets to get under the $3m will need very careful consideration. And if you don’t meet a condition of release, this strategy is not an option.
Tip 2: Change the asset mix to make it more capital stable
Over time, change the mix of assets in the SMSF so there is less chance of “unrealised” gains. Look for relatively “capital stable” assets that pay high income but offer limited prospects of capital growth. Potentially, this means weighting the portfolio to fixed interest securities, credit funds, hybrid securities, term deposits, property trusts and “utility” style companies. Avoid high growth stocks, private equity and speculative assets. Prioritise “franked” investments over “un-franked” investments.
The downside of this strategy is that over the longer term, you are likely to earn a lower investment return.
TIP 3: Even out your superannuation balances
If you haven’t done so already, consider evening out your super balance with your spouse (reduce yours, increase your spouse’s/partner’s). The keys to this strategy are that you must be able to withdraw money from super (i.e. meet a condition of release such as over 65), and your spouse or partner must be eligible to put money back in. Your spouse’s total superannuation balance (TSB) must be less than $1.9m and they must be under 75 in order to make a non-concessional contribution of $120,000. To make the maximum amount of $360,000 under the ‘bring-forward’ rule, it must be less than $1.66m. To get the maximum out of this strategy, make a $120,000 non-concessional contribution prior to 30 June 2025 and potentially another $360,000 post 1 July 2025.
TIP 4: Transfer high growth assets to a family trust
Potentially, a family trust may provide a better platform for tax optimisation. It will depend on factors such as the number of beneficiaries and their tax status, how long you intend to hold the assets, distribution requirements etc. Talk to your accountant about this. (You obviously must be in a position to make a withdrawal from super). There are costs in executing this strategy. Potentially, capital gains tax on the sale of the asset (a transfer will also crystalise a CGT liability), plus in some cases, stamp duty on the transfer.
TIP 5: Do nothing
In many cases, this is the best strategy (at the moment). There is a reasonable chance that the legislation will change (it won’t go back to the Senate until late July,). I have no doubt the Government will go ahead with the tax, but I sense they will find a way to accommodate some of the noise about unrealised gains. My hunch is that they will exempt “family farms” and “small business owners who hold their business property in their SMSF”. I have no data to support this, it is just a hunch. There may be other changes.
Secondly, superannuation will remain a tax effective investment vehicle for individuals with high balances. Unrealised gains is an issue, as is the potential for double taxation on capital gains (not an immediate issue as the starting point will be the market value at 30 June 2025). However, with careful planning and maintaining some liquid assets, the 296 tax liability will in most cases be accommodated.
