Division 296 Update: Where the $3 Million Super Tax Legislation Stands and Key SMSF Planning Considerations

The proposed Division 296 (Div 296) tax, commonly referred to as the "$3 Million Super Tax," continues to be the most critical piece of superannuation reform facing high-balance SMSF members. While the legislation has yet to be formally passed into law, the government remains committed to its introduction.

This is what SMSF trustees need to know about the current status and immediate planning implications.

Current Legislative Status

The Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023, which contains the Div 296 provisions, lapsed on 21 July 2025 following the recent Federal Election.

The Key Takeaway: The Bill is not currently law. However, the government has repeatedly confirmed its intent to reintroduce and pass the legislation, with the proposed commencement date remaining 1 July 2025.

If this date holds true, the first measurement of member balances for the purpose of this tax will be at 30 June 2026.

What Division 296 Proposes

The tax introduces an additional 15% tax on the earnings attributable to the portion of an individual's Total Superannuation Balance (TSB) that exceeds $3 million.

The Critical Point for SMSFs: Taxation of Unrealised Gains

Unlike the tax levied at the fund level, the Div 296 tax is calculated based on the movement in your TSB between the start and end of the financial year (adjusted for contributions and withdrawals). This effectively means the tax captures unrealised gains—increases in the market value of your assets (including direct property) even if those assets haven't been sold and the gain hasn't been locked in.

• Tax Target: The tax is levied on the individual member, not the superannuation fund itself.

• Payment: The member will have the option to pay the tax personally or elect to have the liability released from their superannuation fund.

Planning Action Items for SMSF Trustees

Due to the unique nature of this tax, particularly the inclusion of unrealised gains, proactive planning is essential, even while the legislation is pending.

1. Focus on Member Balance Equalisation

For couples with one member significantly above the $3 million threshold and the other below, strategies may be implemented to even up balances.

• Contribution Splitting: Splitting concessional contributions with a spouse to utilise both members' caps.

• Withdrawal and Recontribution: If eligible, withdrawing funds and recontributing them to a spouse's lower balance fund.

2. The Urgency of Tax Effect Accounting (TEA)

If your SMSF has significant assets with a large difference between the cost base and market value, adopting Tax Effect Accounting (TEA) for the 2024–25 financial year is highly recommended.

TEA is an accounting method that adjusts the value of fund assets to reflect the deferred tax liability (DTL) on unrealised capital gains. The DTL is the theoretical 10% capital gains tax the SMSF would pay if it sold the asset today.

• Why is it urgent? The deadline for formally adopting this methodology is the 30 June 2025 balance date. If TEA is not applied to the opening balance (i.e., the TSB at 1 July 2025), the Div 296 earnings calculation could be significantly inflated.

• Preventing Distortions: The core issue is consistency. The Div 296 tax calculates earnings using the TSB's market value movement, which includes unrealised gains. If your fund doesn't apply TEA, the full unrealised gain is counted as an 'earning' for Div 296 purposes, but the tax liability for that capital gain (paid at the fund level) isn't accounted for in the TSB's starting value. Applying TEA ensures the starting TSB at 1 July 2025 already reflects the future tax cost of those capital gains, preventing that gain from being distorted in the first year's Div 296 calculation. This provides a truer measure of the member's earnings for the year.

3. Review Fund Liquidity

If your fund holds a large proportion of illiquid assets (like unlisted property), you must assess whether the fund will have enough cash to release funds to the member to pay the potential Div 296 liability without being forced to sell assets at an unfavourable time.

Disclaimer: Safenest Super is a professional accounting firm. The information provided is general in nature and does not constitute personal financial or tax advice. We strongly recommend that any member with a total superannuation balance approaching or exceeding $3 million seek professional advice from a licensed financial advisor to assess their unique situation.