What are the changes?
Currently, regardless of your superannuation balance or Total Superannuation Balance (TSB), investment earnings in superannuation accumulation phase are taxed at a maximum rate of 15%. Investment earnings in ‘retirement phase income stream’ are tax free.
From 1 July 2026, if your TSB exceeds $3 million, an additional tax of 15% will be applied to the portion of investment earnings attributable to your TSB over $3 million and a further 10% (totalling 25% extra) if your TSB is more than $10 million. This additional tax is referred to as Division 296 tax (Better Targeted Super Concessions).
The additional tax is going to be assessed to individuals, who then have an option to either deduct the relevant tax amounts from superannuation or pay personally outside super.
From 1 July 2026
For the 2026/27 year (Transition Year)
If your TSB at the end of the 2026/27 financial year exceeds the large super balance threshold (LSBT set at $3 million), you will be subject to Division 296 tax of 15% on the proportion of earnings relating to your TSB that exceeds the $3 million.
In addition, if your TSB at the end of the 2026/27 financial year exceeds the very large super balance threshold (VLSBT, set at $10 million), you will be subject to additional Division 296 tax of 10% (totalling 25% extra) on the proportion of earnings relating to your TSB that exceeds the $10 million.
The Division 296 tax will apply from 1 July 2026, meaning the first affected financial year is the 2026/27 year.
For subsequent years
In considering whether you have exceeded the LSBT or VLSBT for a financial year and are liable to Division 296 tax, your TSB used will be the greater of your TSB amounts either immediately before, or at the end of, that financial year.
Indexation
Going forward, both thresholds, the $3 million and the $10 million, will be indexed to the Consumer Price Index (CPI). The $3 million threshold will be indexed at $150,000 increments, and the $10 million threshold will be indexed at $500,000 increments.
Are there any exemptions from Division 296 tax?
Yes. Exemptions include superannuation income streams of a child (generally established with proceeds of a superannuation death benefit) and superannuation interests with structured settlement contributions. In addition, for the 2026/27 Transition year only, an exemption will be applied to individuals who died during this financial year, other than on 30 June 2027.
What is ‘Total Superannuation Balance’ (TSB)?
Broadly, the TSB is the sum of all amounts you have in the Australian superannuation environment, with limited exceptions. The TSB includes accumulation interests, Transition to Retirement income streams, Retirement phase income streams, and certain Defined Benefit interests. Certain super interests of judges and other State higher level office holders are exempt.
Foreign superannuation interests are also excluded when calculating the TSB.
You can check your TSB by logging on to your MyGov account, then selecting ‘Australian Taxation Office’.
Will unrealised capital gains be taxed?
Not necessarily. When the draft legislation was initially released, it suggested that unrealised capital gains within large super funds may also be taxed. However, this was amended in the final legislation before it became law.
The legislation specifically recognises that some funds have owned assets for a long time and they may have grown substantially in value since they were first purchased. It would be unfair to apply Division 296 tax to all that historical growth. Hence, special relief is available to reset the cost base of these assets before 30 June 2026.
Capital Gains Tax (CGT) cost base update opportunity before 30 June 2026
For the CGT calculations, a super fund can elect to update the cost base of its assets for Division 296 purposes only to protect the historical growth of certain assets. However, the original cost base will be applied when determining the income of the fund for ordinary tax purposes (outside of Division 296).
While the cost base resetting may not be available to members of large superannuation funds, such as master trusts or wrap accounts, it may be an important decision to make for trustees of smaller funds, such as a Self Managed Superannuation Fund (SMSF).
For Self Managed Superannuation Funds
If appropriate, SMSF trustees can revalue their fund assets on 30 June 2026, record the adjusted cost base and opt-in to reset the cost base using the approved form by the due date of their 2026/27 annual tax return. By doing so, for Division 296 purposes only, capital gains accrued on fund assets prior to 30 June 2026 will be excluded from taxable super earnings.
If the super fund elects to adjust the cost base of its assets, it must be done on an “all or nothing” basis. This means the super fund cannot apply the adjustment to some assets only. They must opt in for all assets or for none at all. Therefore, this should be carefully considered as some assets may be in a loss position at 30 June 2026, and the decision to opt in for the relief may not be appropriate based on the fund’s circumstances.
In addition, if the fund elects to adjust the cost base of its assets, it will result in the fund having two separate cost bases for each asset, one for the CGT purposes and one for Division 296 purposes
Considering the level of complexity, SMSF Trustees should seek tax advice from a qualified tax practitioner and make a decision before 30 June 2026.
Strategies to reduce your TSB
There may be opportunities and strategies to consider in the 2026/27 FY to manage your TSB, however, these strategies should be considered on an individual basis. For some clients, there may be an opportunity to withdraw certain amounts from super with a view to invest in alternative investments. However, these opportunities may not be available to all, and when available, should be carefully considered as this action may have an impact on other matters, such as personal tax, estate planning, and certain government concessions.
What can you do next?
If you are uncertain how Division 296 tax will impact you or wish to discuss your options for managing the introduction of this tax, reach out today. You can contact your financial adviser to discuss your options to better understand the outcome based on your personal circumstances.
The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.
