For decades, superannuation has been the cornerstone of retirement planning in Australia, offering a low-tax environment to encourage long-term saving. However, the legislative landscape is shifting. Following extensive debate, the Federal Government has officially enacted the Division 296 tax, a move designed to reduce tax concessions for those with significant superannuation balances.
While the original proposals caused a stir, the final legislation includes several key changes that small business owners and high-net-worth individuals need to understand.
What is the Division 296 Tax?
Starting from 1 July 2026, a new tax will apply to “realised earnings” on superannuation balances that exceed certain thresholds. Unlike the initial proposal, which sought to tax “paper gains” (unrealised increases in asset value), the enacted version focuses on actual income and realised capital gains.
The New Tiered System
The legislation introduces a two-tiered threshold, ensuring that the additional tax is applied progressively:
– Tier 1 ($3 million threshold): An additional 15% tax applies to the proportion of earnings related to balances between $3 million and $10 million. When combined with the standard 15% fund tax, this creates an effective rate of 30%.
– Tier 2 ($10 million threshold): An additional 25% tax applies to the proportion of earnings related to balances exceeding $10 million. This brings the effective tax rate on these earnings to 40%.
Key Wins for Taxpayers: Indexation and Cost Base Resets
In a significant relief for many, the $3 million and $10 million thresholds will now be indexed in line with the Consumer Price Index (CPI). This prevents “bracket creep,” ensuring that inflation doesn’t slowly pull more Australians into the higher tax bracket over time.
Additionally, for those with Self-Managed Super Funds (SMSFs), there is a one-off opportunity to reset the cost base of assets to their market value as of 30 June 2026. This means any capital growth that occurred before the new law kicks in will not be subject to the additional Division 296 tax when the asset is eventually sold.
What Does This Mean for You?
The first assessments will be based on super balances as of 30 June 2027. This gives individuals and families a window of time to review their wealth structures.
For some, it may still be most effective to keep assets within super due to the 30% or 40% caps being lower than the top marginal personal tax rate (47%). For others, it may be time to consider alternative structures, such as family trusts or companies, for future growth-orientated investments.
The team at EMspire Advisory are trusted, qualified Chartered Accountants, tax agents, and small business accountants. We work closely with our clients to achieve the best possible outcomes. To find out more, please contact us!
Please note that this information is not specific and is general in nature and cannot be relied on as advice. Please contact us for advice specific to you and your circumstances.