Division 296 Update: Changes to the Proposed Super Tax Policy

The Australian Government has proposed significant changes to the Better Targeted Superannuation Concessions (BTSC) policy, better known as the Division 296 Tax. As a result of the revised proposal, the start date is now expected to be postponed to 1 July 2026, from 1 July 2025. This provides additional time for investors to consider their options and continue implementing strategies that may help mitigate the impact of the Division 296 Tax. With the Government also indicating further consultation on elements of the proposed policy, additional changes may still materialise, making it important to stay informed.

What is the Division 296 Tax?

The Division 296 Tax was originally proposed to reduce tax concessions on superannuation balances above $3 million by taxing earnings above this amount by an additional 15 per cent, creating an effective tax rate of 30 per cent. With this year’s Federal Election resulting in a continuing Labor Government, it was widely expected that the tax, first introduced to Parliament in 2023, would be implemented according to the original draft legislation. An overview of the initial proposal is available here. Following a period of industry consultation and significant media attention, the Government has now proposed several changes to the policy.

What are the key changes?

The changes announced by the Government are broad, with two of the more contentious elements of the initial policy now proposed to be amended in line with industry feedback.

1. Realised vs unrealised gains: The tax will now only apply to realised gains, addressing concerns that investors could otherwise be taxed on paper gains for assets not yet sold.
2. Indexation: The $3 million threshold will now be indexed, ensuring greater equity for future generations who may otherwise have been affected by inflation.

In addition to these amendments, the Government has also introduced several other changes.

1. Delayed implementation: The start date is expected to be deferred to 1 July 2026, allowing investors to continue executing rebalancing strategies (discussed here and here) to help manage potential impacts.
2. New threshold: A second threshold of $10 million has been proposed with a higher tax rate of 40 per cent on the proportion of earnings above this level.
3. Low Income Superannuation Tax Offset (LISTO): The Government has announced plans to increase both the LISTO (from $500 to $810) and its eligibility threshold (from $37,000 to $45,000), effective 1 July 2027, alongside the legislated income tax cuts.

Are further changes likely?

The Government has already indicated that it will undertake further industry consultation in three key areas.

1. Calculating realised earnings and how to attribute these correctly to individuals for Division 296 purposes.
2. Extending exemptions for certain judicial officers.
3. Ensuring fair treatment of defined benefit members.

The proposed amendments and subsequent consultations will require legislation, involving further parliamentary debate and approval in both houses. The Government is expected to release draft legislation in the new calendar year. As a result, our view remains that investors should continue implementing strategies that have merit in isolation, while refraining from making permanent decisions (for example, withdrawing funds from superannuation) solely to address Division 296. Final legislation has not yet been enacted which is crucial to make informed decisions.

Overview

Division 296 remains one of the more significant proposed reforms to superannuation policy in recent years. An Evans & Partners financial adviser can help you manage this impact and provide guidance on the strategies that can be implemented in advance to mitigate any future impact. A complete overview of the Government’s revised proposal is available here.