Division 296 Super Tax: Government Retreats on Unrealised Gains, But High-Balance Members Still Targeted

The federal government has responded to fierce industry criticism, abandoning its plan to tax unrealised gains in superannuation. However, the revised Division 296 proposal, set to commence from July 1, 2026, will still impose significant new taxes on Australia’s largest super balances.

Key Changes:

• No Tax on Unrealised Gains: The most contentious element—taxing paper gains—has been dropped. Only realised earnings will be taxed, removing the risk of members facing tax bills without the cash to pay them.

• Two-Tiered Thresholds:

  • 15% extra tax on earnings attributable to balances above $3 million.

  • An additional 10% (total 25%) on earnings above $10 million.

• Indexed Thresholds: Both thresholds will be indexed, but only in increments ($150,000 for the $3m threshold, $500,000 for the $10m threshold), not annually.

• Delayed Start: The regime will now apply from July 2026, with the first assessments based on balances at June 30, 2027.

How Will It Work?

The new tax remains a personal liability, but members can choose to pay it themselves or have it withdrawn from their super. Super funds will calculate earnings based on taxable income, aligned with existing tax concepts. The ATO will identify affected members and request information from their funds.

Example:

Julian has $15 million in super at June 30, 2027:

• 80% of his balance ($12m) is above $3m.

• 33% ($5m) is above $10m. If his share of the fund’s taxable income is $500,000, James faces an extra tax bill of $76,665—on top of the 15% already paid by the fund.

Unanswered Questions:

• Treatment of Realised Gains:

It’s unclear whether the new rules will tax only gains accrued and realised after July 2026, or all gains realised after that date, regardless of when they accrued. This distinction is critical for SMSF trustees with long-held assets.

• Capital Gains Discount:

The government says the new tax will be “closely aligned to existing tax concepts”, but it’s not explicit whether the one-third CGT discount for assets held over 12 months will apply.

• Pension Phase Income:

  
  

  Most members with large balances are in pension phase, where much of the income is tax-exempt. How this will be factored in remains to be seen.

  
  

• Total Super Balance Calculation:

  
  

  The previous proposal included changes to how total super balance is calculated, particularly for those with limited recourse borrowing arrangements and defined benefit pensions. Whether these changes will be retained is unclear.

Winners and Losers:

The retreat from taxing unrealised gains is a clear win for SMSF trustees and large fund members. However, the introduction of a 25% marginal rate above $10 million will prompt many to reconsider the role of super in their wealth planning. For those with large unrealised gains built up before July 2026, the lack of clarity on transitional rules may prompt a rush to realise gains before the new regime kicks in.

Bottom Line:

The revised Division 296 tax is less punitive than first proposed, but still represents a significant shift for high-balance super members. With draft legislation not expected until next year, advisers and trustees will be watching closely for the fine print.