If you’ve worked hard to build a strong superannuation balance, you may be wondering how the Federal Government’s proposed Division 296 tax could affect your retirement plans.
Often referred to as the “$3 million super tax”, this proposal has sparked plenty of discussion – and concern – among retirees and those approaching retirement. While it’s not yet law, draft legislation has been released, and the changes could come into effect and backdated to 1 July 2025.
Here’s a clear breakdown of what’s being proposed, how it might affect you, and what you can do to prepare.
What the tax actually applies to
There’s a common misconception that the extra 15 per cent tax applies to all earnings above $3 million. That’s not quite right.
The Division 296 tax applies to the increase in your total super balance (TSB) over the year, including unrealised capital gains. This increase is then proportionally taxed if your TSB exceeds $3 million.
Also worth noting, while super funds usually receive a one-third capital gains tax (CGT) discount on assets held for more than 12 months, this discount won’t apply when calculating the Division 296 tax.
What is changing?
Under the proposal:
– The $3 million threshold is not indexed, meaning it won’t increase over time.
– Unrealised gains (increases in the value of your investments, even if you haven’t sold them) will be included in your earnings.
– If your super balance falls in a given year, you won’t get a refund for any tax paid on previous unrealised gains.
How it works
1. The ATO will calculate your “basis earnings” – the change in your TSB over the financial year, with some adjustments.
2. If your TSB is over $3 million, a portion of those earnings will be taxed at an additional 15 per cent.
3. You can choose to pay the tax yourself or have it released from your super fund(s).
Key dates
If the legislation passes unchanged, the important dates are:
– 1 July 2025 – start of the first financial year the tax applies.
– 30 June 2026 – your TSB on this date will determine if you’re affected.
If your balance is over $3 million on 30 June 2026, you’ll be subject to the Division 296 tax.
Is super still worth it?
Despite the proposed changes, superannuation remains one of the most tax-effective ways to save for retirement. It offers strong asset protection and, in many cases, lower tax rates than other investment structures. Don’t forget – the pension phase is still tax-free.
That said, for some individuals, it may be worth exploring other options like:
– Personal investments
– Investment bonds
– Family trusts
– Companies
What should you do now?
It’s a good idea to start planning early. The team at Ord Minnett Noosa can help you explore your options and tailor a strategy that suits your goals and circumstances, reach out and start a conversation today.
We’ve also created a Division 296 tax calculator to help you estimate your potential tax liability.
And for more information, download our Division 296 Quick Reference Guide and FAQs.
As always, it’s important to speak with a financial adviser to ensure any strategies are right for your situation because there is no one size fits all with this proposed change.
Tread carefully – and plan wisely.
Tom Hartvigsen is an Authorised Representative (no 000470576) of Ord Minnett Ltd ABN 86 002 733 048, AFS licence 237121. This article contains general financial advice only. Tom can be reached on 07-5231 9966 or thartvigsen@ords.com.au.
