Will your super be affected when the $3 million balance tax hits?

The Australian government plans to introduce a new tax targeting superannuation balances over $3 million, commonly referred to as the Division 296 tax. If enacted, this measure would apply an additional 15% tax to a portion of earnings linked to super balances above the $3 million threshold.

The government first announced the proposal in February 2023, with an intended start date of 1 July 2025. Lawmakers designed the tax to improve equity in a system that offers generous concessions to high‑balance super holders.

Why the $3 Million Super Tax Was Delayed

After announcing the proposal, the government paused progress amid debate over two key issues:

• The $3 million threshold is not indexed, meaning more people could be caught by the tax over time
• The tax applies to unrealised capital gains, which means it can tax increases in asset values even if the fund does not sell the asset

With Parliament now sitting again, the government is expected to reintroduce the legislation. The Bill proposes adding Division 296 to the Income Tax Assessment Act 1997, which is why many commentators refer to the measure as the Division 296 tax.

How the Division 296 Super Tax Would Work

Under the current rules, superannuation earnings in accumulation phase are generally taxed at 15%.

If your total superannuation balance (TSB) stays below $3 million, the new tax would not apply. Your TSB includes all super across every fund, whether the money sits in accumulation or pension phase.

If your TSB exceeds $3 million, Division 296 would impose an additional 15% tax on a portion of calculated “earnings” linked to the excess above the threshold. Importantly:

• The tax applies to you personally, not to your super fund
• The calculation uses a formula, not your fund’s actual investment earnings
• The calculation can include unrealised gains, such as increases in property values

Example: How the $3 Million Super Tax Could Apply

Consider a simplified example where your super fund holds a single property:

• Property value at start of year: $3,000,000
• Property value at end of year: $3,500,000
• No contributions, withdrawals or cash income

The Division 296 calculation could work like this:

• Excess over $3 million:
  $3,500,000 − $3,000,000 = $500,000
• Excess as a percentage of total balance:
  $500,000 ÷ $3,500,000 = 14.29%
• Taxable “earnings” under Division 296:
  $500,000 × 14.29% = $71,450
• Additional tax payable at 15%:
  $71,450 × 15% = $10,717.50

In this scenario, you would pay an extra $10,717.50 in tax, even though the property generated no cash income and the gain remained unrealised.

Cash Flow and Practical Considerations

If your super fund holds illiquid assets, such as property, and produces little or no income, you may need to fund the tax personally unless you sell assets within the fund. The Division 296 formula also adjusts for contributions and withdrawals to prevent last‑minute transactions designed to reduce taxable earnings.

This example is simplified. Events such as insurance payouts, First Home Super Saver withdrawals and other transactions can further affect the calculation.

How You Would Pay the Division 296 Tax

The ATO would notify you of any Division 296 tax liability after the end of the financial year, starting with the 2025–26 year if the measure proceeds.

You could choose to:

• Pay the tax out of pocket, or
• Pay the tax directly from your super fund

If you hold multiple super funds, you would be able to nominate which fund pays the amount.

What Should You Do Now?

The Division 296 tax is not yet law. However, if your super balance approaches or exceeds $3 million, the proposal could significantly affect your long‑term retirement strategy.

Before making any decisions, consider seeking professional advice. Changes to contribution strategies, asset allocation or fund structure can have unintended tax and compliance consequences if made hastily.