Big Changes to the Proposed Division 296 Super Tax

The federal government has reworked its plan to tax superannuation balances of more than $3 million. The updated proposal of Division 296 was unveiled this week and aims to strike a better balance between budget savings and fairness for fund members.

Originally, the proposal would have doubled the tax rate on super earnings for individuals with total balances over $3 million, increasing the concessional rate from 15% to 30%. The most widely discussed concern with the original plan was that it would have applied even to unrealised gains. Unrealised gains refer to increases in the value of assets that have not been sold. The idea quickly came under fire due to the risk of cash flow problems and for effectively taxing people on income they had not yet earned.

After widespread feedback from industry bodies, financial advisers, and retirees, the government has now gone back to the drawing board. Here’s what has changed.

Realised gains only

The revised model will no longer tax unrealised gains. Instead, it applies only to actual income and realised capital gains, such as interest, dividends, and profits on assets that have been sold. This ensures people are taxed only on earnings they have received, rather than on theoretical increases in the value of their investments.

The government said this change makes the system “simpler, fairer and more sustainable” while still targeting the top end of the superannuation market.

Two-tier rates for large balances

Rather than a single 30% top-up rate, the tax will now use a tiered approach:
• Earnings on balances between $3 million and $10 million will be taxed at 30%.
• Earnings on balances above $10 million will attract a higher 40% rate.

These rates apply only to the earnings linked to the portion of the balance above each threshold, not to the entire account.

Indexation of thresholds

Another significant improvement is that both the $3 million and $10 million thresholds will be indexed to inflation. This prevents “bracket creep,” where ordinary growth in super balances over time might otherwise bring more people into the scheme. According to Financial Standard, only around 80,000 Australians currently hold more than $3 million in super, so this remains a measure targeted at the very wealthy.

Later start date

If passed into law, the new rules are scheduled to take effect from 1 July 2026, with the first tax assessments expected in the 2027–28 financial year. This means total superannuation balances will first be measured at 30 June 2027 for the initial round of the tax.

Why it matters

The government’s goal with the introduction of the Division 296 tax is to limit tax concessions for very large super balances. For high-balance investors, now is the time to seek advice on how these changes could affect your future tax position and retirement plans.