Changes to taxation of high super balances

The Australian Government has announced significant changes to the proposed Division 296 tax, which is designed to reduce generous tax concessions on very large superannuation balances. These changes aim to make the policy fairer and more sustainable, following widespread criticism of the original proposal.

What Is Division 296?

Division 296 is a new tax measure that targets superannuation balances over $3 million. Under the current super system, earnings in the accumulation phase are taxed at 15%, and in the retirement phase, they’re generally tax-free. The government believes this provides a disproportionate benefit to individuals with very large super balances.

Division 296 introduces additional tax on the earnings from super balances above certain thresholds:

• 30% tax on earnings from balances between $3 million and $10 million
• 40% tax on earnings from balances above $10 million

Importantly, these thresholds will now be indexed to inflation, meaning they will increase over time to avoid more Australians being unintentionally caught by the tax.

Key Changes to the Original Proposal

The original version of Division 296 was criticised for several reasons, including:

• Taxing unrealised capital gains (i.e., increases in asset value even if the asset wasn’t sold)
• Having a fixed $3 million threshold, which would have captured more people over time due to inflation

In response, the government has made the following key changes:

1. No tax on unrealised gains – Only realised earnings (such as interest, dividends, rent, and capital gains from sold assets) will be taxed.
2. Two-tiered system – A second threshold of $10 million has been introduced, with a higher tax rate for balances above this level.
3. Indexation of thresholds – Both the $3 million and $10 million thresholds will be adjusted in line with the Consumer Price Index (CPI) in increments of $150,000 and $500,000, respectively.
4. Delayed start date – The tax will now apply from 1 July 2026, giving individuals and super funds more time to prepare.

Who Will Be Affected?

The government estimates that fewer than 0.5% of Australians will be impacted by Division 296. Those most likely to be affected include:

• High-income earners with large super balances
• SMSF members with significant assets
• Individuals using superannuation for estate planning or intergenerational wealth transfer

What Happens Next?

It’s important to note that these changes are not yet law. The revised Division 296 proposal must still be passed by Parliament before it becomes legislation. The government has indicated that the new version has a clearer path forward, with support from key crossbench parties.

Final Thoughts

While Division 296 is aimed at a small group of Australians, it represents a major shift in how superannuation is taxed at the upper end. The removal of tax on unrealised gains and the introduction of indexation are welcome changes that address many of the concerns raised by industry experts and taxpayers.

If you have super balances approaching or exceeding these thresholds, it’s worth reviewing your strategy and seeking professional advice to understand the potential impact.