News of changes to the Division 296 tax has been welcomed, but like its first iteration, questions remain about its operation and, as Jason Spits writes, also its deeper impact on the superannuation system.

In February 2026, the proposed Division 296 tax will celebrate its third anniversary of being a key superannuation and tax policy central to the fiscal goals of a government that has been unable to get it through parliament despite strongly prosecuting its case.

It will also create a sense of deja vu in which the superannuation system, including the SMSF sector, will have had to quickly digest Treasury proposals for an additional tax on earnings in super above certain thresholds.

Of course, the key difference is none of it will be new ground, but rather an area that has been fiercely contested, resulting in, depending on who you ask, a massive backdown by the government or a good, albeit very slow, response to problems with the tax first presented in 2023.

While it is too early to dig deep into the revised version of the tax (see: How we got to this point) the shift away from levying the tax on unrealised gains to realised earnings is effectively a reset of the impost.

Welcome news
Given its previously oversized impact on SMSFs, is it a win for the sector? Colonial First State head of technical Craig Day believes it is and notes the shift from taxing unrealised gains to realised earnings or income has been universally welcomed despite the lack of information on how this will be calculated.

“It is a win because taxing paper profits was not a good tax policy and while the initial tax calculations are now gone, because they were so flawed, it was a simple method for working out the tax that required much less reporting by the super sector,” Day says.

SMSF Association chief executive Peter Burgess was one of those who welcomed the decision to revise the Division 296 tax, noting its particular impact on the SMSF sector.

“This is a win because the severity of the tax has been reduced, especially for SMSFs, of which 17,000, such as small business and primary producers, hold business premises in their funds and faced problems immediately if a member has more than $3 million in super,” Burgess notes.

“We welcomed the change because it was what we were asking for from day one of this tax being announced.”

Soft cap surprise.
What was not sought was the addition of a second threshold at $10 million where the tax would be ramped up to 25 per cent, and given these caps carry no forced obligation to leave super, Day sees it as an expansion of the revenue-gathering plans inherent in the first version of Division 296.

“You could view it as a soft cap or extra tax take because the new version of the tax aims to recoup revenue just like the original proposal did, but it may work as a soft cap depending on the assets held by a super fund member,” he explains.

“For example, unrestricted, nonpreserved benefits could be moved out because you can get lower tax elsewhere, such as in a family trust, but capital gains tax will arise if those assets are moved.”
Heffron managing director Meg Heffron doesn’t regard the twin thresholds as stealth soft caps and points out there is a lower, more effective cap regime already in place.

“We have had caps in place since 2017 via the transfer balance caps and unlike the old reasonable benefit limit regime, what we don’t have is compulsory cashing,” Heffron says.

“What we will have with the TBC and Division 296 is a cap and a way to claw back tax concessions on superannuation, but the revised tax may encourage some people to exit the super system, but will not force it.”

Burgess notes the addition of the higher threshold represents an even more targeted element of the new impost, but still ties into a long-standing stated aim of the government to generate revenue for budget repair.

“Even at $3 million and $10 million, super funds members are still getting tax benefits, but the government is aiming for additional tax revenue with the new threshold given the amount it will collect, based on the forward estimates, drops from $6 billion to $2 billion, partly because of the delay caused by these changes,” he states.

Policy remains as calculations change
Many of these macro-policy outcomes may have been forgotten in the push to have Division 296 based on realised income rather than paper profits, but a significant structural shift will still take place in once it is introduced.

Heffron suggests any shift in the longterm treatment of large balances should be expected and changes will reflect current aspects of the system.

“Tax policy has to evolve, but it has to be fair to the people in the system. Many people feel better about the revised proposal because the issue was with the
original design of the tax, rather than paying more tax,” she claims.

“At the same time, fund members can expect to leave a legacy, but it should not be funded by the taxpayer, so it is reasonable for the government to reduce concessions if
you have millions in super.”

Accurium head of SMSF education Mark Ellem points out the mechanics of the revised changes will push the burden of calculating Division 296 tax for each super fund member, regardless of whether they are in an Australian Prudential Regulation Authority (APRA)-regulated fund or SMSF, from the ATO onto fund trustees.

“Previously, the ATO was to calculate the amount of Division 296 earnings and amount attributable to a member, but now the fund will do that work and calculate the taxable amount and report this to the ATO,” he indicates.

“The ATO will then calculate the proportion of the total super balance exceeding each threshold and the total Division 296 tax liability.

“Under the first version, a trustee had to know how the tax worked so they could get to the same figure to verify it. Now the trustee will have to provide that figure and substantiate it to the ATO and fund members.”

This shift would appear to favour SMSFs and their members in comparison to APRA regulated funds as they are able to track the earnings and tax at the member level, but Day expects there may still be issues to be addressed across the board.

“SMSFs can deal with earnings on a proportional basis, but this may become more complex where the investment strategies of members differ and it would be more complex if a fund or member had multiple investment strategies,” he says.

“Not all large fund members will have difficulty as those using wrap accounts operate like an SMSF and assets and income are linked to individual accounts, but it will be a problem for APRA regulated funds that uses a master trust structure.

“They use a unit price rather than income per member and that price goes up and down with the market, but there is no dividend per member because they don’t operate systems that exist for this outcome.”

Similar issues arise when dealing with capital gains as the revised version of Division 296 will now need to implement a start date for when those gains will fall under the new tax regime, with Ellem indicating another new process will have to be applied.

“How will they ensure only realised gains attributable to post-30 June 2026 will be included in the calculation of Div 296 superannuation earnings?” he asks.

“The talk is we will likely have something along the lines of the 2017 capital gains tax (CGT) cost base reset mechanism that was part of the introduction of the transfer balance cap regime.

“It will also be interesting to see whether the CGT discount is applied when calculating attributable realised capital gains for Division 296 purposes and how capital losses will be considered, if at all.”

According to Heffron, while working out a workable method to allocate capital gains under the new impost may be harder than calculating earnings, SMSFs once again have an advantage.

“They have rules under which they can realise gains at a specific time so when they sell an asset they can calculate capital gains tax that the fund pays, as well as what should be considered under Division 296,” she says.

Yet this raises an issue that bothered many people under the initial version of the tax and that is how will these calculations be equitable for all members in terms of their operation and cost. The government has committed to this, stating it will allow a ‘fair and reasonable’ approach for APRA regulated funds to calculate realised earnings per member and will consider CGT using accepted taxation principles.

“The calculations will depend on what is legislated and hopefully the government comes up with a method that does not have a huge cost,” Heffron adds.

“Why should thousands of members with lower balances pay for the tax treatment of high-balance members yet at the same time why should an unfair tax be levied against some people because of those balances?”

Given the concern about unrealised gains and the impact of that tax policy, Burgess acknowledges it was not a given SMSFs would be treated more equitably under the revisions proposed for the measure.

“This tax is not our preferred approach to claw back tax concessions on superannuation and the problem is the system is not designed for a tax at the member level, but for tax at the fund level,” he highlights.

“For some APRA-regulated funds these calculations may be impossible and we are concerned about equity and if there will be winners and losers from these revisions.

“We want to see the SMSF sector handled fairly and the new version of the tax be workable given it has a wider impact on SMSFs than other parts of the sector.”

Better and simpler?
While the devil will be in the detail, it seems the government may be stuck between a rock and a hard place by either creating a tax that is unfair and flawed, but generally simple to implement, or one fairer and more aligned with accepted tax principles, but with much more complexity in key areas.

“The SMSF sector called for this change because we could provide the data for members,” Ellem recognises.

“As an industry we will have to pay the price for more complexity and to recognise the better outcome it means taking on the extra work.”

For now, the clock is still ticking as the government plans to have draft legislation for the Division 296 Version 2.0 introduced into parliament by the start of February 2026.

Given it still needs the revenue, it raises the question whether it will try to jam a square peg in a round hole a second time.

How we got to this point

The release of the revised plans for the Division 296 tax, also known as the Better Targeted Superannuation Concessions, is the latest move in a long-running saga that started on
28 February 2023 when the government announced it would introduce an additional 15 per cent tax on superannuation earnings on balances above $3 million.

This announcement set off a protracted series of discussions and consultations in which a key issue emerged, that is, the tax, which would be levied as a personal tax on super fund members, was to be based on unrealised gains in their funds.

While many people were happy to accept the premise of a lower tax concession for people with high super balances, the singular aspect of taxing unrealised gains created two distinct groups – those supporting the tax as a necessary step to claw back some concessions and reduce the budget deficit and those opposed to it due to the unusual and unprecedented tax position taken by the government.

That position led the government to dig in and refuse to concede any ground, even in the closing days of parliament sitting in late 2024 when it became clear the Division 296 legislation would not proceed through the Senate due to opposition from the coalition and a handful of independents.

It was not further pursued prior to the federal election in May this year, with Treasurer Jim Chalmers repeating the mantra there would be no changes to the tax, and so lapsed when parliament was prorogued for the poll.

Chalmers maintained that line after the government was returned, despite it having sufficient support in the Senate to pass the bill as first presented in early 2023.

However, the super sector saw nothing, apart from rumblings from government backbenchers and retired Labor stalwarts about the need to make changes, raising suspicions things might change given the 1 July 2025 start date came and went with nothing in place.

The situation changed on 13 October when the revised Division 296 measure appeared without fanfare or detail, but with significant headline changes. These included shifting the calculation of the tax to realised earnings, the introduction of indexation of the $3 million threshold at which the tax applies and a new $10 million threshold, also to be indexed, at which the tax rate would increase from 15 per cent to 25 per cent, and a new proposed start date of 1 July 2026.

Chalmers said at the time: “These are sensible changes which take two years of feedback into account while still maintaining the main objectives of our policy.

“The original model was the best option identified at the time, but we have taken the decision to adjust the model to recognise the views we have heard since then.”

However, none of the mechanics as to how this revised and rebooted tax will operate were presented. Consultations on key aspects, including on how to calculate the tax and attribute it to individual fund members, were to begin immediately with the government keen to release draft legislation before the end of the year and introduce a new bill when parliament resumes in the first week of February 2026.

Read the full magazine here