The Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023 (“the Bill”), which has passed the House of Representatives and currently sits with the Senate, sets to impose a new tax on individual’s with a superannuation balance above $3 million. The proposed Div. 296 presents a number of issues to both members and trustees of superannuation funds, which if passed, will require careful consideration from persons to which the new tax would apply.

What is Division 296 and what does it do?

Income earnings and concessional contributions made to a superannuation fund are typically taxed at a rate of 15%. Effectively, superannuation funds are government sanctioned tax havens. The proposed Div. 296 would be an exception to this general rule. Div. 296 operates by imposing a 30% tax on taxable superannuation earnings that exceed the superannuation balance threshold, of $3 million. The provisions of the new division employ a formula for calculating a taxpayer’s taxable superannuation earnings  that ensures that Division 296 tax will only be applied to the part of earnings responding to the percentage of an individual’s total superannuation balance that is greater than $3 million.

A person’s total superannuation balance and taxable superannuation earnings for an income year are worked out at the end of each income year. 

The amount of an individual’s basic superannuation earnings for an income year is determined by subtracting their previous [total superannuation balance] TSB, which is their TSB immediately before the start of the year, from their current adjusted TSB, which is their adjusted TSB at the end of the year.

It is important to note that the proposed tax is not a tax on income or capital but is a tax on earnings. This means that notional gains, such an urealised capital gains are included in an individual’s taxable superannuation earnings. This has been the primary controversy surrounding Division 296.

The amendments also includes provisions to allow for adjustments to be made to a total superannuation, and also provides a regulation-making power to enable regulations to modify how the adjusted TSB is worked out, particularly how to work out the total withdrawals and contributions. The regulation-making power is necessary so that commensurate treatment applies to defined benefit interests and that the laws can operate effectively and as intended.

The proposed Div. 296 has not, however, been without controversy. A recent article from Accountants Daily[1] highlights a theoretical “nightmare scenario” of an SMSF that had a large yet temporary unrealised gain caused by a surging stock price, followed by a sharp decline in the stock’s value in the next income year, leading to a large Div. 296 tax liability for the taxpayer that was not tied to any real gain or income and would have caused financial ruin for the taxpayer.

While such a scenario may be cause for alarm of the proposed amendments to superannuation taxation, this type of nightmare situation could be easily avoided with proper and considerate financial and tax planning. This does not mean, however, that the new tax (if it does come into effect) will not cause cash flow challenges for certain funds and their members.

Division 296 tax is a personal tax liability, meaning that individual taxpayers are personally liable for Div. 296 tax on their taxable superannuation earnings. The Explanatory Memorandum to the bill states that individuals can choose how to pay their Division 296 tax liability, either by releasing amounts from one or more of their superannuation interests or by paying the liability from outside of the superannuation system (or a combination thereof). Self-managed superannuation fund rules may need to be updated to allow for such releases.

Under the proposed scheme, superannuation funds must give to the Commissioner of Taxation a statement (in approved form) about a superannuation interest held in a superannuation fund for an individual during the financial year. From there the ATO will issue a notice of assessment to the individual of the amount of Div. 296 payable. Division 296 tax is due and payable at the end of 84 days after the Commissioner gives to a taxpayer a notice of assessment. A general interest charge will be charged against Div. 296 tax debts not paid within the 84 day period.

Although the Bill has yet to pass the Senate, if it does become law, Div. 296 tax will first be applicable for the 2025-2026 income year, meaning that assessments for taxable superannuation earnings will not be issued until after 30 June 2026.

If the Bill is passed, individuals that will, or are likely to, fall within the ambit of Division 296 will need to carefully review their super fund rules and circumstances to ensure that, if Div. 296 tax does apply to them, they do not sleepwalk into a potential Div. 296 nightmare.

Example

Jess has a TSB of $4 million on 30 June 2025, and $4.5 million on 30 June 2026.

Jess receives concessional contributions to superannuation of $27,500 in the 2025-26 income year, including $9,500 in salary sacrifice contributions.

For Division 296 tax purposes, her total contributions for the year are $23,375 after correcting for the 15 per cent tax paid by her superannuation fund on these concessional contributions as under subsection 296-55(2) (85 per cent x $27,500).

Jess’s adjusted TSB at the end of the year is calculated to be $4,476,625 by deducting her total contributions of $23,375 from her end of year TSB of $4.5 million as under section 296-45.

Jess’s basic superannuation earnings for Division 296 tax in the 2025-26 income year are calculated as $476,625 by subtracting her previous TSB from her adjusted current TSB under subsection 296-40(2) ($4,476,625 – $4 million).

As Jess does not have unapplied transferrable negative superannuation earnings under paragraph 296-110(1)(b), under paragraph 296-40(1)(a) her superannuation earnings for the 2025-26 income year will be her $476,625 in basic superannuation earnings.

As her TSB at the end of the year is greater than the large superannuation balance threshold of $3 million and her superannuation earnings for 2025-26 are greater than nil, Jess will have taxable superannuation earnings for Division 296 tax purposes under subsection 296-35(1).

The percentage of Jess’s superannuation earnings above the $3 million threshold is calculated as 33.33 per cent, by calculating the percentage of her TSB at the end of the year over $3 million rounded to 2 decimal places under subsections 296-35(2) and (3) (($4.5 million – $3 million)/$4.5 million).

Jess’s taxable superannuation earnings for Division 296 tax are calculated as $158,859.11 by multiplying her superannuation earnings by the percentage of the earnings above the threshold under subsection 296-35(1) (33.33 per cent x $476,625).

This taxable superannuation earnings amount will be taxable at 15 per cent. Jess will have a Division 296 tax liability of $23,828.85 for the 2025-26 income year (15 per cent x $158,859.11).

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[1] https://www.accountantsdaily.com.au/tax-compliance/20646-practical-scenarios-demonstrate-dire-consequences-of-div-296-tax-auditor-warns%20%20taxable%20superannuation%20earnings.