Division 296 Tax: What SMSF Members Need to Know

What is Division 296 tax?

Division 296 tax (A.K.A the $3 million super tax or Division 296 super tax) is a new personal tax that applies to individuals whose total super balance across all funds exceeds $3 million.

While it's classified as a personal tax liability, it is calculated on the super fund earnings attributable to balances above the $3 million threshold. This applies regardless of fund type. SMSFs, retail funds and industry funds are all in scope.

When does Division 296 start?

The first affected financial year is FY27, meaning the tax applies from 1 July 2026. For this first year the member balance that matters most is 30 June 2027. There is still time to plan, but that window is closing.

Who is affected by Division 296?

Anyone whose total super balance exceeds $3 million across all their super funds. This includes members of SMSFs, industry funds and retail funds. It's your combined balance across every fund that counts, not just one.

If your balance is currently below $3 million but trending upward, it's worth understanding the rules now so you're not caught off guard down the track.

What are the Division 296 tax rates?

There are two tiers:

1. 15% on the proportion of super fund earnings that relates to the individual's balance above $3 million.
2. 10% on the proportion of earnings that relates to the balance above $10 million.

These rates apply on top of the standard 15% tax already paid by the super fund on its earnings.

How is Division 296 tax calculated?

The Division 296 tax is based on the taxable investment income earned within the super fund, with some adjustments. The effective rate calculation works by apportioning fund earnings according to how much of your balance sits above the $3 million (and $10 million) thresholds.

Here's a simplified div 296 example:

• Total super balance: $4 million
• Fund earnings for the year: $200,000
• Proportion above $3 million: $1 million out of $4 million = 25%
• Earnings subject to Division 296: $200,000 x 25% = $50,000
• Division 296 tax (15%): $50,000 x 15% = $7,500

This is in addition to the 15% fund tax already paid on total fund earnings by the SMSF itself. The Division 296 tax effective rate calculation can get more complex depending on your fund structure, investment mix and whether balances cross the $10 million tier. We recommend working through the numbers with your SMSF accountant or a tax consultant if required.

How is Division 296 tax paid?

Once you receive the notice from the ATO, you can either the tax personably or you can nominate to pay from your SMSF.

Does Division 296 tax unrealised capital gains?

No. This was a significant concern with earlier versions of the proposed Division 296 tax legislation, but the revised version that passed Parliament does not tax unrealised capital gains. The tax is based on actual taxable investment income within the fund, with some adjustments.

This is an important distinction and one that caused a lot of confusion during the consultation period.

Capital gains relief for SMSFs?

All SMSFs will be given the opportunity to opt in to reset the cost base their assets as at 30 June 2026. This would be so that you can reduce future capital gains included in the Division 296 earnings calculation. If you decide to apply the relief, it must be applied to all assets no matter if they are in a loss or gain position. It is also important to note that this does not affect the nominal fund tax which would still apply at the fund level.

Should I withdraw money from super before Division 296 starts?

I might’ve been asked this question a hundred times from clients, colleagues, friends and family. It’s a fair question without a clear answer because, as always, it depends.

Withdrawing funds from super to bring your balance below $3 million might seem like the obvious move, but it's rarely that straightforward. You should consider:

• Your personal marginal tax rate on investment income outside super
• The types of structures you have available to move assets to & implications of doing so (e.g CGT, Stamp duty)
• The impact on your estate planning and death benefit tax position
• Consider the option to opt-in to reset the cost base of all the SMSF assets
• Whether you're in accumulation or pension phase
• Your overall retirement income strategy
• The long-term cost of removing funds from the concessional super environment

For some people, keeping funds in super will still be the better outcome even with Division 296 in play. For others, a partial withdrawal or restructure may make sense. This is exactly the kind of decision that requires tailored financial advice, not a one-size-fits-all approach.

For people with more than $3Million, who have not met a condition of release (eg. not of pension age and therefore unable to withdraw assets from super), will not be able to escape the Div 296 tax.

I don't have $3 million yet but should I be planning for Division 296?

If you're on track to reach the $3m in super mark in the coming years, there are steps you can take now to structure your super in a way that minimises the impact when it does apply.

This is where proactive planning with your SMSF accountant and financial advisor can really pay dividends down the line.

What should SMSF trustees be doing now?

With the Division 296 tax legislation now through Parliament, it's time to move from "wait and see" to action. Here's a practical checklist:

1. Review total super balances across all funds to understand exposure
2. Model the tax impact using current fund earnings and balance projections
3. Assess whether moving assets to other structures can reduce the effective tax rate
4. Consider contribution and withdrawal strategies in the context of your broader tax position
5. Review estate planning to account for the interaction between Division 296 and death benefit tax
6. Speak with your advisor to map out a plan before 1 July 2026

Talk to BlueRock's SMSF and Tax Experts

Division 296 is one of the most significant changes to superannuation we’ve seen, and the planning window before it takes effect is narrowing. Whether you’re a current client or looking for solid advice, our SMSF and tax advisory specialists can help you work through the detail.

Get in touch via the form below to talk through your Division 296 strategy well before 30 June.

Disclaimer: The information in this article is intended as general information only and should not be considered as advice on any matter and should not be relied upon as such. This information has been prepared without taking into account any individual objectives, financial situation or needs. You should therefore consider the appropriateness of the information before acting or seek advice before making any financial decisions.