Labor changes tack with Division 296

In a move that reshapes the taxation of large superannuation balances, the Government has announced revisions to the Division 296 tax framework—known as the Better Targeted Superannuation Concessions (BTSC), this revised policy abandons the controversial unrealised earnings approach in favour of a realised income approach aligned with standard income tax principles.

For SMSF professionals and high-balance SMSF members, this isn’t just a tax tweak. It’s a structural recalibration of how concessional treatment applies at the top end of the super system.

 

A Policy Shift Anchored in Purpose: The Superannuation Objective Act 2024

It is important to note that the BTSC reforms haven’t just occurred in isolation. They directly align with Labor’s Superannuation (Objective) Act 2024, which legislates the objective of super as:

“To preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.”

This framework has been central to shaping these reforms where the measures aim to maintain sustainability by refining concessions for individuals with $3m+ super balances, ensuring they remain concessional but not excessive. It also introduces a tiered tax model that increases progressivity while aligning to existing income tax structures, creating policy consistency and fairness (based on this objective).

 

What’s changed and why

The original Division 296 proposal drew criticism due to its reliance on unrealised earnings—an approach unfamiliar and unworkable in both practice and principle.

Now, with the revised model starting 1 July 2026, the Div 296 tax adopts a realised earnings approach, enabling a more logical and exact approach in calculating the tax liability, using existing tax principles.

 

New Mechanics: Realised Earnings & Tiered Taxation

The BTSC imposes an additional member-level tax on realised earnings for individuals with large balances, in two tiers:

• 15% tax on earnings, where a member’s TSB is between $3 million and $10 million.
• 25% total tax (additional 10%) on earnings where a member’s TSB is above $10 million.

“Applying a more progressive treatment to superannuation taxation while remaining concessional compared to individual tax rates.”
— BTSC Fact Sheet, Treasury

The existing fund-level tax regime (15% for accumulation, 0% for retirement phase income) remains unchanged.

 

How It Works: Attribution and Assessment

• The ATO identifies members with a TSB ≥ $3 million
• The fund calculates and reports realised earnings attributable to in-scope members
• The ATO applies a tiered tax formula, assessing the Div 296 tax liability
• Members can pay the tax personally or elect to release the tax liability amount from their nominated super fund.

Whilst specifics are currently unknown from the Treasury fact sheet, it is reasonably safe to assume that process will lean on the ‘fair & reasonable’ allocation rules under SISR 5.03.  We also expect additional safeguards  to be added through ATO guidance that will aim to prevent manipulation of the earnings or unreasonable allocation (e.g. potential application of Part IVA).

To understand this further, let’s explore the following examples:

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Example 1: Megan – Balance Above $3.0m

Megan is 58 years old and a member of both an APRA-regulated fund and a self-managed super fund (SMSF). As at 1 July 2026, her total super balance (TSB) across both funds is $4.5 million—placing her above the $3 million threshold, but well below the $10 million upper tier.

During the 2026–27 financial year, Megan’s total realised earnings from her super accounts amount to $300,000, with $100,000 coming from her APRA fund and $200,000 from her SMSF. Since the proportion of her balance above the $3 million threshold is 33.33%, the Div 296 tax applies only to this portion of her earnings.

To calculate her Div 296 tax liability, we apply the 15% additional tax to the applicable share of earnings:

Div 296 Tax = 15% × 33.33% × $300,000 = $15,000

Megan’s total additional tax under Division 296 is $15,000. She will be notified by the ATO of this liability and can choose whether to pay it personally or release funds from her super accounts.

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Example 2: Emma – Balance Above $10.0m

Emma, aged 55, is a member of an SMSF and has a total super balance of $12.9 million at the end of the 2026–27 financial year. That year, she is attributed $840,000 of realised earnings from her SMSF—subject to the new Div 296 tax rules.

In her case, a significant portion of her balance exceeds both the $3 million and $10 million thresholds. Specifically:

• • 76.74% of her balance exceeds the $3 million threshold

  • 22.48% exceeds the $10 million threshold

To calculate Emma’s tax, we apply the tiered Div 296 tax rates:

• • The first portion (76.74% of $840,000) is taxed at 15%

  • The second portion (22.48% of $840,000) is taxed at an additional 10% (on top of the 15%)

The total Div 296 tax calculation is as follows:

Div 296 Tax = (15% × 76.74% × $840,000) + (10% × 22.48% × $840,000)
= $96,672 + $18,909 = $115,581

Emma will be assessed for an additional $115,581 in Division 296 tax, payable either personally or via a release from her super account, depending on her election.

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Indexation & Coverage

To preserve fairness and alignment with broader superannuation thresholds, the thresholds will align with the Transfer Balance Cap (TBC) (currently $2.0 million).

• The $3 million threshold will be indexed in $150,000 increments (1.5x TBC)
• The $10 million threshold will be indexed in $500,000 steps (5x TBC)

It should be noted that the Treasury estimates < 0.5% of Australians will be affected by the measures in 2026–27, and < 0.1% exposed to the 40% tax tier.

 

What’s the timeline?

The Government has indicated that legislation is likely to be introduced into Parliament as a Bill in early 2026, following a period of industry consultation to finalise items such as the realised earnings approach, etc.

Where passed through both houses of Parliament in law, it will apply from 1 July 2026, covering the 2026-27 financial year, with first assessments expected to be issued in 2027–28.

 

Final Thoughts

These Division 296 amendments are long overdue to a Government that appeared stubborn to listen to industry to fix these concerns that had been raised.  Only pressure from within from the PM’s office saw Labor revisit these laws with the Treasury and now provide a more palatable solution – one that could have been achieved much earlier if they had of taken on board the concerns in the first instance.

However, we have arguably arrived at a much better place now from a legislative standpoint, and can now better plan with SMSF clients impacted by these measures.