How the New Super Tax Changes Could Impact Your Retirement Plan

Division 296 introduces an additional 15 per cent tax on earnings attributable to the portion of an individual’s total superannuation balance that exceeds $3 million. Tax is assessed to the individual and is based on an aggregation of all super accounts. Strategic planning is essential before 30 June 2026 for those likely to be impacted by the tax.

While the Division 296 tax is still yet to be legislated, it’s looking increasingly likely the tax will be introduced. For individuals who may be impacted by the change, it’s critical to understand how different scenarios might play out and what they should consider.

Superannuation has always offered generous tax concessions, but the government wants to ensure these benefits are shared more fairly. The Division 296 tax targets individuals with very large super balances, aligning the system with its main purpose, helping people save for retirement.

What Are The Key Details?

Here’s how the proposed Division 296 tax is expected to work:

• The additional 15% tax applies to balances over $3 million. For example, if your balance is $3.5 million, the tax will only apply to earnings on the $500,000 above the threshold.
• Earnings include both realised and unrealised gains. This means you could be taxed on market growth, even if you haven’t sold the assets.
• The $3 million cap is not indexed to inflation, meaning more people may be affected over time as super balances grow.

Under the draft legislation, the ATO would calculate the tax and send the bill directly to you, not your super fund. You could either pay it out of pocket or withdraw the amount from your super.

Who Will Be Affected?

While only 0.5% of Australians currently have super balances over $3 million ², more people could cross this threshold in the future as their balances grow. Here are some realistic scenarios to show how this could happen across different income levels and life stages:

Age	Income	Scenario	Projected Outcome
25	$65,000 (entry-level)	A graduate starting their career with modest income and standard 11.5% SG contributions.	Likely to reach $2–$2.5 million by retirement, staying under the cap.
35	$100,000 (mid-career)	A professional with consistent income growth and a $50,000 starting balance from earlier years.	Could accumulate $3.2–$3.6 million, crossing the $3 million threshold.
45	$120,000 (steady earner)	A mid-career earner with a $250,000 starting balance and no voluntary contributions.	Likely to reach $3.5–$4 million, requiring tax planning to manage the cap.
55	$180,000 (high-income earner)	A late-career professional who has consistently maximised contributions over 30 years, starting with $400,000.	Likely to reach $5 million+, making them heavily impacted by the new tax.

For those nearing retirement, it’s important to review balances regularly. Market growth, extra contributions, or a higher starting balance could push you past the $3 million cap, making preparation and planning essential to manage the potential impact of the Division 296 tax.

Challenges of Division 296 Tax

The introduction of the Division 296 tax brings several challenges, especially for individuals who rely on superannuation for retirement and wealth planning. Here are the key issues to consider:

Cash Flow Pressure

The tax applies to market gains, including unrealised gains. In other words, you might be taxed on gains you haven’t yet realised through a sale. If you don’t have liquid assets outside of super, you may need to withdraw funds from your super account to pay the tax, reducing your long-term retirement savings. For example, holding property in your self-managed super fund (SMSF) could result in a tax bill based on increased market value, even if the property hasn’t been sold.

Impact on Estate Planning

Super has traditionally been a tax-effective way to transfer wealth to the next generation. However, the Division 296 tax reduces the attractiveness of holding high-growth assets in super, especially for balances over $3 million. Beneficiaries may inherit less if your super balance is reduced by ongoing tax liabilities or withdrawals to cover the tax. For example, if you planned to leave your super as a legacy for your children, you might need to explore alternatives such as transferring wealth outside of super or using family trusts.

No Inflation Adjustment

The $3 million cap is not indexed to inflation, meaning more Australians will exceed the threshold over time as balances naturally grow. Even individuals with modest incomes could eventually cross the cap, especially younger professionals with decades of compounding growth. For example, a 25-year-old earning $80,000 annually may not expect to be affected now but could exceed the cap by retirement.

Administrative Complexity

Tracking the growth of your super balance including unrealised gains, requires regular valuation of all assets, especially for SMSFs holding property or other illiquid investments. Managing this complexity adds administrative burden and costs, particularly for those with diverse super portfolios. For example, if your SMSF holds shares, property and private investments, each asset will need to be valued annually to comply with ATO requirements.

How Can You Prepare?

Here are some practical steps to minimise the impact of the Division 296 tax and optimise your retirement strategy:

• Check Your Super Balance: Use tools like MyGov or speak to your super fund provider to check your total super balance and project its growth over time.
• Reassess Your Investment Strategy: Review where you hold high-growth or speculative assets such as shares or property, and consider whether they’re better placed inside or outside of super. Diversifying your investments into family trusts, personal portfolios or other vehicles could reduce your tax exposure.
• Plan for Cash Flow: Develop a strategy to fund future tax payments, whether through personal savings, liquid assets within super or a mix of both. Setting aside a portion of annual returns in a liquid asset can help cover potential tax liabilities.
• Review Your Estate Plans: If you’re using super as part of your legacy planning, explore alternatives that reduce tax impact on your beneficiaries. Transferring high-growth assets to a family trust, for instance, may offer greater flexibility in wealth distribution.
• Maximise Contributions Before 2025: If you’re close to the $3 million threshold, consider maximising contributions before the Division 296 tax takes effect. Use your concessional and non-concessional caps to make additional contributions in the 2024–25 financial year.
• Seek Professional Advice: Work with a financial adviser who understands the complexities of superannuation to create a tailored plan. They can model scenarios and help you decide whether to rebalance your portfolio or explore alternative vehicles.

It’s important to remember that for the vast majority, super remains a tax-effective way to save for retirement. Even if you’re affected by the Division 296 tax, it’s still one of the best vehicles for long-term wealth building. The key is making sure your strategy is working for you, no matter what changes come your way.

How Carbon Can Help You Navigate the Division 296 Tax

Our Wealth Management team is here to simplify the process and help you make the most of your superannuation. Whether you’re just starting out, building wealth mid-career or approaching retirement, we’ll guide you every step of the way.

We’ll help you understand how your super balance might grow over time and whether this proposed tax could affect you. From there, we can develop strategies to minimise your tax exposure, such as reviewing your investments, exploring alternative structures and planning for cash flow. If estate planning is part of your financial goals, we’ll show you practical ways to protect your wealth for the next generation.

With our expert guidance, you’ll have a clear plan to manage these changes and stay in control of your financial future. Contact us today to book a consultation. Together, we’ll help you navigate these changes with confidence and secure the retirement you deserve.

Sources

¹ Most pre-retirees in the dark on Div 296, report finds, AccountantsDaily

² Expect 80,000 to have a $3m super balance by 2025: ASFA, MoneyManagement

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