The proposed changes to the superannuation tax treatment on balances over $3million.
Superannuation has long been Australia’s tax haven with retirees currently being able to move $1.9million into pension phase where the earnings are tax free. Income and realised capital gains on balances held in accumulation phase are currently taxed at 15% with a one third discount on the capital gain if the asset is held over 12 months. Additionally, as this $1.9million limit is only on the amount of funds that may be moved to pension phase, under the current tax rules, these funds could grow to any amount and still receive the tax free treatment on earnings.
A new tax on superannuation balances over $3million has been proposed and is currently being reviewed. With a proposed commencement date of 1 July 2025, this additional tax will be payable on the growth in the total superannuation balance and not as a result on the income or realised capital gains.
This proposed additional tax will be payable personally. However, Individuals may request one or more of their superannuation funds to release certain amounts to pay the tax, or a combination of these options. The individual will not be required to have met a condition of release to access these funds from their superannuation.
With this proposed new tax, it is important to understand its application to ensure the possible impact on your retirement assets is considered and to understand what alternate options are available.
Calculation Method:
The actual calculation of this additional tax is not as bad as it first sounds. The portion of the superannuation balance that is over the large superannuation balance ($3million) is applied as a percentage to the applicable earnings of the fund. It is this percentage of the earnings of the fund that the 15% additional tax is applied to. It is important to note that contributions and withdrawals to superannuation are accounted for in this calculation
This idea is best expressed through examples.
Example 1.
Jack started the 2025/26 financial year with a total super balance of $2.8million. There were no contributions to his account through the year and through sheer investment performance, Jacks account has grown to $3.2million. Given the balance at the end of the year exceeds $3million, the proposed Division 296 tax would be liable.
This tax amount would be calculated as follows:
Closing Super Balance = $3.2million
($3.2million-$3million)/$3.2million = 6.25%
Taxable earnings = $200k x 6.25% = $12,500
Division 296 Tax = $12,500 x 15% = $1,875
Example 2.
Jill started the 2025/26 financial year with a total super balance of $4million. Additionally, Jill contributed $300k as a Downsizer Contribution following the sale of her prior main residence. Through this contribution and investment performance her account has grown to $4.8million. The Division 296 tax would be applied as follows.
Adjusted Closing Total Super Balance = $4.8million – $300k = $4.5million
Superannuation Earnings = $4.5million – $4million = $500k
($4.8k -$3million)/$4.8million = 37.5%
Taxable earnings = $500k x 37.5% = $187,500
Division 296 Tax = $187,500 x 15% = $28,125
Alternate Options:
Equalizing Member Balances Between Spouses
As the additional tax is payable based on the individual total superannuation balance it may be prudent to ensure that the superannuation balances between couples are not largely uneven when this tax may be payable.
As there are limits on making non concessional contributions to superannuation once your balance exceeds $1.66million, this means that prior planning in the contributions may be more effective for managing this potential tax.
One potential solution would be the use of super splitting where the net concessional contributions received by one member of a couple is able to be moved into the superannuation balance of the other. Other a period of many years, this strategy could have a large impact on the future expected superannuation balances of each individual.
Withdrawing Funds
Pending having access to superannuation it may be beneficial to consider drawing funds from superannuation and investing these funds outside of the superannuation environment. Investing these funds in your joint personal names would allow members of a couple to split the taxable income in each of their personal names. Given the availability of the tax-free threshold, the earnings on these funds may still be able to be earnt tax free.
What to do?
Although this legislation is yet to be finalised, you may wish to consider speaking with a Financial Advisor to consider the impact of the Division 296 tax on your individual financial position.
