What’s Changed, What’s Clearer, and How SMSF Trustees Should Respond

Division 296 is moving from policy discussion to practical reality. While the new tax is not scheduled to apply until 1 July 2026, recent developments have provided clearer direction on how it is expected to operate, even though the legislation is still progressing.

From CIB’s perspective, Division 296 does not call for rushed decisions. Instead, it calls for measured preparation, careful modelling, and an understanding of how timing and structure influence outcomes.

A Shift in How Large Super Balances Are Taxed

Division 296 represents a recalibration of tax concessions for individuals with very large superannuation balances.

Importantly:

• It does not limit how much can be held in super
• It does not impose a tax on balances themselves
• It introduces an additional tax on a portion of investment earnings, assessed at the individual level

Super remains a legitimate and effective long term investment environment but for balances above certain thresholds, the historical tax advantage is being narrowed rather than removed.

How the New Tax Is Intended to Operate

While the final legislation is still to pass, the structure is now broadly understood:

• The tax applies progressively once a member’s total super balance exceeds $3 million, with a further layer applying above $10 million
• It is calculated using a formula based approach, rather than a flat surcharge
• Only realised investment outcomes are included (such as interest, rent, dividends and realised capital gains)
• The tax is personal, even though the underlying data comes from super funds
• Members will have the option to release amounts from super to pay the liability

For SMSF trustees, this places greater emphasis on record keeping, attribution of earnings, and timing of transactions.

An Indicative Tax Illustration

To illustrate how the tiered structure works in practice, consider the following simplified example.

Assume an SMSF member has a total super balance of $12 million, and the fund generates $1 million of investment income in a future year.

• The portion of the member’s balance between $3 million and $10million falls into the first additional tax band and may attract an extra 15% tax on the earnings attributable to that layer.

• The portion of the balance above $10 million falls into a second band and may attract a further 10% tax on the earnings attributable to that top layer.

In effect:

• Earnings linked to the first band may be taxed at around 30% in total, and
• Earnings linked to the top band may be taxed at up to 40% in total,

once the existing superannuation tax is taken into account.

The important takeaway is that not all earnings are taxed at the highest rate. Division 296 operates as a progressive overlay, with the overall impact depending on how far a balance exceeds the thresholds and how earnings are realised during the year.

Timing: A Critical but Often Overlooked Factor

One of the more nuanced aspects of Division 296 is how and when balances are measured.

The first year of operation differs from later years, and future calculations may reference either the opening or closing balance – whichever is higher. This means:

• Actions taken too early may have no practical effect
• Actions taken too late may fail to reduce exposure
• Large withdrawals or asset sales can have flow on consequences beyond a single year

In our experience, misunderstanding timing rules is where the greatest planning errors occur.

Capital Gains and Long Held Assets

For many SMSFs particularly those holding property or long term investments, capital gains will be a key pressure point under Division 296.

The framework recognises that gains accrued before the new tax starts should be treated differently from future growth, but this outcome depends on trustee elections, asset records, and valuations at the transition date.

This elevates the importance of:

• Accurate cost bases
• Reliable asset valuations
• Understanding how CGT outcomes interact with long term strategy

CIB View: Strategy First, Structure Second

We are already seeing concern from trustees about whether money should be removed from super to avoid the new tax.

Our view is more cautious. In many cases:

• Super may remain tax effective even after Division 296
• Exiting super can accelerate capital gains tax, stamp duty and reinvestment tax
• Poorly timed decisions can create larger tax costs than Division 296 itself

Division 296 does not automatically make super unattractive, it simply demands greater precision and forward planning.

What Trustees Should Be Doing Now

Rather than acting prematurely, trustees should focus on positioning:

• Modelling projected balances over the next 3-5 years
• Reviewing liquidity and asset concentration
• Ensuring earnings attribution between members is robust and defensible
• Identifying where flexibility exists and where it does not

These steps preserve optionality, which is critical in a regime where outcomes are driven by timing and structure rather than headline rates.

Looking Ahead

Division 296 is not a one-off change, it will unfold over time through legislation, administration and trustee behaviour.

The trustees best placed to navigate it will be those who:

• Avoid reactive decisions
• Seek clarity before committing capital, and;
• Treat Division 296 as a long term planning issue, not just a new tax bill

Superannuation remains a powerful vehicle. The rules are changing but strategy still matters more than headlines.

If you’d like a personalised Division 296 impact review, balance modelling, or CGT transition analysis, our Superannuation Services team can assist.