Division 296 tax: Essential strategies for SMSF trustees and advisors

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We recently hosted a webinar with Meg Heffron, managing director and co-founder of Heffron, a firm that specialises in SMSF services and administration. In this webinar, Meg discussed the now-legislated Division 296 tax: what has changed from the original proposal, how the calculations work, and what it means for your clients. (More information about the tax is also available on the Heffron website.)

For those who could not attend, we provide the full video below, as well as a short summary of some of the key points.

What is Division 296 tax?

Division 296 tax is an additional tax that applies to individuals with superannuation balances exceeding $3 million. Starting from the 2026-27 financial year, it imposes an extra tax on the proportion of super earnings attributed to members who are above the relevant threshold.

Some fundamentals have stayed the same since the tax was first announced. As Meg explained, "It's not an increase in fund taxes. It's not an increase in existing individual taxes — it is a totally separate brand new tax on individuals."

The fact that it is levied on the individual matters: even couples in the same fund are assessed separately. A couple with total super balances of $4 million ($2 million each) would not be subject to Division 296 tax.

Two thresholds, two rates

The legislated version of Division 296 introduces two tiers:

• Over $3 million: An additional 15% tax on the proportion of earnings relating to the balance above $3 million, bringing the effective rate (including the 15% fund tax already paid) to 30%.
• Over $10 million: A further 10% on the proportion of earnings relating to the balance above $10 million, bringing the effective total to 40%.

Both thresholds will be indexed periodically with inflation — a significant change from the original proposal, which included no indexation at all. The $3 million threshold will increase by $150,000 at a time; the $10 million threshold by $500,000 at a time.

How the balance is determined

One important change from the original proposal concerns how a member's total super balance is assessed each year. For most years, the ATO will look at the member's total super balance — across all funds — at both the start and end of the financial year, and use whichever is higher.

"We look at what a client had across all their super funds at the beginning of the year and at the end of the year, and we take the bigger one,” explains Meg.

There is one exception: in the very first year of operation (2026-27), only the end-of-year balance will be used. This gives clients more time to consider any changes, since the relevant reference point is 30 June 2027, not 30 June 2026. In subsequent years, the standard "greater of" rule applies. This means that even a client who withdraws a substantial amount during the year may still face a Division 296 tax bill if their balance at the start of the year exceeded $3 million.

How Division 296 earnings are calculated

Division 296 is levied on a proportion of a member's superannuation earnings, not on their entire balance. The earnings figure starts with the fund's tax return, with several adjustments:

• Capital gains are included on a realised basis (after the one-third CGT discount) — a return to normal tax principles from the original proposal, which controversially included unrealised gains
• Dividends, interest, rent, trust distributions and franking credits are all included
• Contributions are excluded — Division 296 targets investment income, not contributions
• Income exempt from fund tax (such as exempt current pension income, or ECPI) is added back in
• Deductible expenses are knocked off, including those that would have been deductible if the fund had no pensions.

For SMSFs, an actuarial certificate is used to allocate the fund's total Division 296 earnings between members. In a two-member fund with roughly equal balances, the split will be approximately 50/50. SMSFs will report this information to the ATO via two new labels on the SMSF annual return. Large funds (industry and retail) must allocate earnings in a way that is "fair and reasonable," giving them more flexibility to reflect each member's actual investment activity.

Capital gains: SMSF cost base adjustment

Both SMSFs and large funds are protected — in different ways — from paying Division 296 on capital gains that accrued before the tax commenced. The intent is the same: members should only be taxed on gains that arise after 30 June 2026.

For SMSFs, this is achieved through an optional cost base adjustment. If a fund opts in, the cost base of every asset is reset — for Division 296 purposes only — to its market value at 30 June 2026. The fund's regular tax cost base is unaffected.

"If they opt in to this relief, they basically adjust the cost base of everything they hold at that date to the 30 June 2026 value for Division 296 only," says Meg.

This is an all-or-nothing election at the fund level — a fund cannot opt in for some assets and not others. SMSFs with assets currently in a loss position should consider this carefully: opting in would lock in a lower cost base for those assets, increasing future Division 296 tax on any eventual sale. SMSFs that opt in should also ensure that 30 June 2026 asset valuations are accurate and well-documented, as these become the fixed reference point for all future Division 296 capital gains calculations.

The deadline to opt in is the due date of the 2026-27 annual return — typically May 2028 for SMSFs with a tax agent that have consistently lodged on time. Lodging the 2025-26 return late will bring that deadline forward, so timely lodgement matters.

Every SMSF is eligible to opt in — not just those already above $3 million. Funds currently under the threshold may still benefit if members are likely to grow above $3 million in future, for example through a reversionary pension following the death of a spouse.

For large funds (industry and retail), a graduated transitional relief applies instead. In the first year of operation, 80% of capital gains can be excluded from Division 296 earnings. That exclusion reduces by 20% each year, reaching zero from 2030 onwards. After that, all realised capital gains are included in full.

Strategies for SMSF members

Of course, the most common question is what SMSF trustees should actually do in response to this tax, and whether it makes more sense to leave money in super or take some out.

Meg offers a practical framework based on where a client's balance sits.

"If someone's got less than $3 million, probably do nothing," she says.

"Super is just as tax effective as it's always been.”

For those with balances between $3 million and $10 million, the picture is more nuanced. Some earnings will be taxed at an effective 30%, but that may still compare favourably to the alternatives outside super.

"That's probably about as good as they can get," says Meg, noting that clients at this level are unlikely to find significantly better rates elsewhere — particularly once you account for the tax treatment of income and capital gains outside super.

For those with more than $10 million, some earnings face an effective 40% rate, which may prompt a closer look at structures outside super.

"The question would be: could I get a better rate outside super?" says Meg.

She cautions, however, that moving money into a company — while taxed at 30% — creates additional tax obligations when income is eventually extracted as dividends.

Death and Division 296

Meg also highlights the interaction between Division 296 and death — a consideration that is particularly relevant for the age group most affected by this tax.

"Division 296 is going to be an extra tax on realised gains," she says.

"Death is a time when we sell a lot of assets, we realise a lot of gains. That's going to really bump up Division 296 tax bills in that final year."

Combined with existing death benefit taxes and the forced realisation of assets within a super fund at death, this creates a compelling case for some clients to gradually draw down their super over time — particularly for those in the over $10 million bracket.

For those who could not attend the webinar, you can watch the full video below:

About Meg Heffron

Heffron Managing Director Meg Heffron, has been working exclusively in SMSFs since 1998. She is one of the few actuaries to work in all areas of SMSF practice. Her passion is turning technical knowledge about SMSFs into practical solutions that accountants and advisers can use to help their clients and grow their businesses.

She is a sought-after speaker at events for industry professionals and their clients, a regular contributor to the Australian Financial Review, The Australian and SMSF trade publications and a trusted source in the development and implementation of superannuation policy via government and regulators.

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FURTHER READING

• More information about Division 296 tax
• The importance of asset allocation tracking for SMSFs
• Record keeping tips for SMSF trustees
• 4 reasons SMSF trustees should be tracking dividends