Key takeaways

Additional tax applies to super balances over $3 million, increasing effective tax rates on earnings.

Calculating total superannuation balance and managing illiquid or multi-fund structures will require careful analysis.

Restructuring or withdrawing funds without expert guidance may lead to unintended and irreversible consequences.

Superannuation remains one of the most tax-effective environments in which to accumulate retirement savings. The introduction of Division 296 of the Income Tax Assessment Act 1997 (ITAA) does not change that for most people. However, for those with large superannuation balances, they may want to review whether their current arrangements are still appropriate.

From 1 July 2026, an additional tax will apply to individuals whose total superannuation balance (TSB) exceeds $3 million. Specifically:

If an individual’s TSB is above $3 million but below $10 million, an extra 15% tax will apply to the proportion of earnings that relate to the amount over $3 million (headline 30% total).
If an individual’s TSB exceeds $10 million, a further 10% tax will apply to the proportion of earnings that relate to the amount over $10 million (headline rate 40% total).

The first assessments will be on 30 June 2027, based on the individual’s TSB as at 30 June 2027. After the first year, the assessment will be based on the higher of the TSB at the start or the end of the income year.

Determining whether an individual’s TSB is likely to exceed either of the above thresholds may not be straightforward in certain circumstances. For example, where a person has a number of superannuation interests via more complex arrangements, such as across several funds or defined benefit schemes, calculating the total TSB will be more complicated and will require a more detailed level of analysis.

If a small superannuation fund holds illiquid assets (such as business real property), it becomes more important to address issues of valuation, as the tax is based on the individual’s TSB, being the sum of the individual’s “TSB values” across all of their superannuation interests, derived from the underlying value of assets within each relevant fund.

Importantly, under the legislation as enacted, the tax will only apply to realised earnings, being realised at fund-level, including interest, dividends, rent and (realised) capital gains.

Notably though, for the purpose of calculating taxable capital gains under the Division 296 regime, funds (including SMSFs) will have access to a one-off election to reset the cost base of fund assets to their market value as at 30 June 2026.

The cost base reset election for small superannuation funds provides a mechanism for the Division 296 tax only to apply to gains accruing from the commencement date of the regime, being 1 July 2026.

This election will not suit every fund. While the election may be beneficial where assets have accrued significant unrealised gains before 1 July 2026, it may produce a less favourable outcome where a fund also holds assets standing at an unrealised loss. For that reason, trustees will need to consider the position carefully.

How the cost base reset operates in practice: Example scenario

Consider a self-managed superannuation fund that acquired an asset for $600,000. By 30 June 2026, the asset has appreciated significantly and is valued at $1.5 million. The fund subsequently sells the asset for $1.8 million. If the fund makes the transitional cost base reset election, the tax outcomes differ depending on the regime being applied. For ordinary income tax purposes, the capital gain continues to be calculated using the original cost base, resulting in a gain of $1.2 million. However, for Division 296 purposes, the gain is instead measured from the reset market value as at 30 June 2026. This means only the $300,000 increase in value from that date to the eventual sale is taken into account. In effect, the election ensures that only post-1 July 2026 growth is captured under the Division 296 regime, excluding gains that accrued prior to its commencement.

How to prepare for the changes

You may like to seek advice if you are an individual with a superannuation balance close to, or in excess of $3 million in order to understand how these measures might affect your circumstances.

You should also seek legal, accounting and financial advice if you:

are a member of a fund that is largely illiquid (that holds property or investments that are not easily sold); or
if you have implemented succession planning strategies that rely on your superannuation fund balance as part of the implementation of that strategy.

It is important to avoid taking any steps to restructure your superannuation arrangements or withdraw funds until you have obtained expert legal, accounting and financial advice on how these changes may affect your position. Decisions made prematurely, or without a full understanding of the Division 296 regime, may lead to unintended tax consequences or the loss of existing strategic benefits within your fund. In particular, if superannuation remains the most appropriate structure for holding your investments, you may not be able to recontribute amounts once they have been withdrawn due to contribution caps and eligibility restrictions. Taking a measured and informed approach will help ensure that any actions taken are aligned with your long-term financial and succession planning objectives.