Insights

High-net-worth Australians are now under increased scrutiny with the federal government’s proposal of Division 296 Tax—a significant reform that introduces an additional tax on superannuation balances over $3 million. This proposed super tax will not only impose new financial obligations but also introduces a contentious concept: tax on unrealised gains in superannuation.

With the re-elected Labor government strengthening their position in parliament, they have announced they want to introduce this legislation. It will be a case of who supports it to pass it through the Senate, with the Greens and Liberals requiring different changes before either will support the broadly proposed rules.

Here’s everything you need to know about the $3 million super tax, how it works, who it impacts, and what steps you can take to mitigate its effects.

What Is the Proposed Division 296 Tax and Who Will It Affect?

Division 296 Tax is a legislative proposal to impose an additional 15% tax on earnings attributable to the portion of an individual’s superannuation balance exceeding $3 million. This brings the total tax rate on that portion to 30%—double the standard concessional rate of 15%. Division 296 is a completely new tax and is on top of all existing taxes the taxpayer is subject to.

Initially, the division 296 tax is only expected to affect around 80,000 Australians; however, one of the main issues that has led to resistance from the Liberal party and most professionals in the superannuation field is that the proposed $3 million threshold will not be indexed. Without indexation, and as a result of ongoing super contributions and capital growth, the number of those who will be affected by division 296 tax will grow rapidly in future years.

When Is Division 296 Proposed to Take Effect?

Originally, the Division 296 tax was scheduled to commence on 1 July 2025, meaning the 2025–26 financial year would have been the first in which affected individuals will see its impact. As we edge closer to 1 July 2025, and the proposed bill still yet to be passed through parliament, we can only expect that should the law come into place, that this initial date would push out to at least 1 July 2026.

How Will Division 296 Tax Be Calculated?

Division 293 tax liability will be calculated by following the below steps:

– Take the individuals total superannuation balance as at the end of the previous financial year, subtract $3 million, then divide this amount by their total superannuation balance as at the end of the previous year, giving you the % of your total balance over $3 million (e.g. $6 million – $3 million = $3 million. $3 million / $6 million = 50%).

– Then, calculate your “earnings” for division 296 purposes, which is calculated as your total superannuation balance at the end of the relevant financial year minus your total superannuation balance at the start of the financial year, whilst excluding the effect of any contributions or withdrawals in that particular year (e.g. $6 million opening balance, $6.5 million closing balance, assume no contributions or withdrawals, total “earnings” for division 296 purposes = $500,000).

– You then multiply the above two figures, giving you your assessable division 296 earnings (e.g. 50% x $500,000 = $250,000 division 296 earnings).

– Your division 296 earnings are then multiplied by 15% (division 296 tax rate), giving you your division 296 tax liability for the financial year (e.g. $250,000 x 15% = $37,500 division 296 tax).

Ultimately, this represents a dramatic shift in the tax system, as the ATO would be taxing individuals on unrealised gains on assets such as property and shares that have not yet been sold.

What Are the Risks of Division 296 Tax on Unrealised Gains?

The introduction of a tax on unrealised gains raises several concerns, including:

• Liquidity issues: Tax may be payable even without cash flow, requiring asset sales or withdrawals to meet tax liabilities.

• Valuation challenges: Accurately valuing complex or illiquid assets each year can be difficult and costly. With the introduction of taxing unrealised gains, inaccurate valuations could lead to paying tax on overstated values.

• Market volatility: Individuals could be taxed on gains that later reverse, with no compensation for losses.

These risks make Division 296 a controversial and complex measure for both investors and advisers.

What Can Be Done to Minimise the Effects of Division 296 Tax?

Nothing right now. No legislation is proposed or passed, and there will be time after it passes to discuss your strategy with your financial and tax advisers. The strategies to be considered to help reduce your exposure to the super tax include:

• Reviewing the structure of your investments and diversifying into more liquid or less volatile assets.

• Reassessing contribution strategies and considering alternative investment vehicles outside of super.

• Engaging in strategic estate and retirement planning to manage your long-term exposure.

Proactive tax planning with a specialist is critical to navigate these changes effectively.

Secure Your Retirement Wealth—Talk to Our Superannuation Experts

The Division 296 Tax could have a significant impact on your retirement strategy and long-term wealth. Contact your trusted Altitude Adviser today to schedule a consultation to review your position and develop a personalised strategy to secure your long-term investment goals.