Australia’s superannuation system is undergoing a major transformation with the introduction of Division 296 tax, often referred to as the $3 million super tax. Targeting individuals with high super balances, this tax has sparked intense debate—particularly among Self-Managed Super Fund (SMSF) trustees and members.
What Is the Division 296 Tax?
At its core, Division 296 imposes an additional 15% tax on superannuation earnings tied to an individual’s total superannuation balance (TSB) above $3 million.
Key Features of the $3 Million Super Tax:
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Applies to Individuals, Not Funds: The tax is assessed personally, not on your SMSF or super fund.
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Aggregates All Super Accounts: Your TSB includes all superannuation accounts—SMSFs and APRA-regulated funds combined.
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Focuses on Earnings: The tax applies to super earnings, calculated based on changes in your TSB over the year, adjusted for contributions and withdrawals.
Why Is Division 296 Controversial?
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Taxing Unrealised Gains
A key concern is that Division 296 taxes unrealised gains—meaning tax is levied on increases in the value of assets even if they haven’t been sold. This is especially challenging for SMSFs holding illiquid assets like property or farmland, which may create cash flow issues. -
No Refunds for Losses
If your super balance drops below $3 million or incurs losses in future years, there’s no refund for the Division 296 tax already paid. While losses can be carried forward, they may not fully offset future obligations.
How the Division 296 Tax Is Calculated
Here’s a simplified breakdown of the calculation:
- Calculate Earnings: TSB at year-end minus TSB at year-start, plus contributions, minus withdrawals.
- Find the Proportion Over $3 Million:
Example: A $4 million TSB means $1 million is over the threshold (25%). - Apply the 15% Tax:
15% × total earnings × proportion over $3 million.
How the Tax Will Be Paid
The Australian Taxation Office (ATO) will issue an assessment. Affected individuals can pay it personally or request a release from their super account to cover the liability.
Important: The $3 Million Threshold Isn’t Indexed
The $3 million cap is not indexed to inflation. Over time, more Australians—particularly those with long-term SMSF growth strategies—could find themselves caught by this tax.
What Division 296 Means for SMSFs
While the tax applies to individuals, SMSFs will experience significant indirect effects:
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Valuation Accuracy Matters
Accurate market valuations are now critical, as these directly influence the Division 296 earnings calculation. -
Cash Flow & Liquidity Concerns
SMSFs with real estate or other illiquid assets must plan ahead to manage potential tax payments on unrealised gains. -
Need for Strategic Planning
Members nearing the $3 million threshold should revisit their contribution strategies, investment allocations, and pension planning. -
Professional Guidance Is Crucial
With complex implications, SMSF trustees are strongly advised to consult a financial advisor or accountant to tailor an effective response.
Stay Updated on Division 296 Developments
As the Division 296 legislation continues to evolve, it’s essential to stay informed about potential concessions, clarifications, or amendments before full implementation.
Final Thoughts
Division 296 isn’t just another tax—it signals a broader shift in how superannuation balances are regulated and taxed. For SMSF members with larger balances, early planning and expert advice will be vital to manage compliance, optimize tax outcomes, and preserve retirement wealth.
Need help planning your SMSF strategy around Division 296?
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Credits
Sundaram Shanmugam, Smart SMSF Team
