Words on Division 296: The Latest Updates Explained

Words on Division 296: The Latest Updates Explained

“These recent changes represent a major shift in the policy direction.” — Ishara Rupasinghe

In this new episode, Senior Strategy Adviser Ishara Rupasinghe is joined by Strategy Adviser Lucy Pentelow to unpack the recently announced updates to Division 296. If implemented, the proposed change would be one of the most significant changes to superannuation taxation in recent years. Ishara and Lucy explore what’s new, what remains the same, and how investors can strategically prepare for this key reform. Tune in now to find out how these changes may affect you.

This episode is also available on Apple Podcast. 

Ishara Rupasinghe (00:17)
Hello and welcome to Words on Wealth. I’m Ishara Rupasinghe, Executive Director and Senior Strategy Advisor at Evans and Partners in Canberra. Our guest today is Lucy Pentelow, who is one of our talented investment and strategy advisors based in Sydney. Welcome Lucy.

Lucy Pentelow (00:32)
Thanks for having me a shower, it’s really great to be here.

Ishara Rupasinghe (00:35)
So today we’re diving into the recent updates to the Better Targeted Superannuation Concessions Policy. Now this is better known as the Division 296 tax. Now it’s been a topic that’s ⁓ generated considerable attention since it was first proposed back in 2023. And for many of our clients at Evans & Partners, these recent changes represent a major shift in the policy direction. So we wanna walk through what’s actually changed, what hasn’t changed.

and critically what you should be thinking about over the coming months. Now before we dive into those details, Lucy, can you give us a bit of background to explain what Division 296 is all about for those who might have missed our previous updates?

Lucy Pentelow (01:17)
Yeah, so the Division 296 tax was originally designed to reduce tax concessions on large superannuation balances. Now in this instance, large refers to balances over $3 million. The government’s position has been that these concessions become disproportionately generous at higher balance levels and they’re seeking to recalibrate the system. Now whilst the core concept remains, the way it’s been implemented has shifted substantially based on industry feedback and consultation.

The implementation date has also been pushed back. So it’s moved from the 1st of July, 2025 to the 1st of July, 2026.

Ishara Rupasinghe (01:56)
Yeah, and I think that’s certainly good news. It gives us all more time to prepare and from an advisor’s point of view, this is time that we can use to think strategically about how we’re gonna structure clients’ portfolios moving forward. So with that, let’s talk through the changes. Lucy, can you take us through the first one?

Lucy Pentelow (02:14)
Yeah, the first and probably most contentious element is the removal of tax on unrealized capital gains. This change is a huge win for investors. Now, under the initial draft legislation, your superannuation could have been taxed on paper gains, even if you hadn’t sold the underlying assets. So imagine holding commercial property in your self-managed superfund that increase in value by, let’s say, $500,000 in the year.

Under the old proposal, a portion of that gain would have been attracted to the division 296 tax, even if you hadn’t sold the property and realised any cash. Now this created created two major problems for investors. First being there was a liquidity liquidity issue. So how do investors pay tax on gains that they hadn’t realised, especially if the assets were a liquid? And secondly, there was a nightmare scenario of paying tax on gains one year.

only to see those gains evaporate the next year should the markets correct itself with no mechanism for a refund for these investors.

Ishara Rupasinghe (03:18)
Yeah, and that was a major concern for Superfund members, but now this new approach addresses it by calculating earnings based on realised gains and income only. ⁓ And that certainly brings the Division 296 calculation more consistent with how ⁓ the existing capital gains tax framework ⁓ works.

Lucy Pentelow (03:40)
Yeah, definitely. It’s much more sensible now. ⁓ And the second major change is the introduction of indexation. And this was really important to see for long-term planning. Now, the $3 million threshold will be indexed to inflation. So without the indexation, more and more people, including myself, would have been caught by this tax over time simply through normal investment growth and inflation.

The decision to index the threshold is a sensible long-term measure that provides certainty and fairness across the board.

Ishara Rupasinghe (04:12)
Look, yeah, that’s indeed much more fair, particularly to the younger generation who’ve had superannuation guarantee paid for their most or if not all of their working lives and therefore they’re likely to get to those balances during their lifetime. So it absolutely makes sense. Now the third change is quite a significant one for clients with very large balances. So the government has introduced a new 40 % tax rate

for balances above $10 million. So what we now have is effectively a three tier tax system for superannuation. So let’s say someone has $12 million in super, they’d pay the standard 15 % tax on earnings up to $3 million, then an effective tax rate of 30 % on earnings related to the balance between free and $10 million, and then an effective tax rate of 40 % on earnings.

on balances above $10 million. So that’s a three tier structure now.

Lucy Pentelow (05:11)
Yeah, that tiered system seems much more logical and fair across the board. And I think that’s the biggest concern that’s been addressed there. Now, the fourth major change is the low income superannuation tax offset or more commonly known as the listo, which has increased from three hundred and ten dollars to eight hundred and ten dollars. Now, this is less relevant to most of Evans and Partners clients, but it still demonstrates that the government’s attempt to balance the measure across the whole spectrum.

Ishara Rupasinghe (05:38)
Yeah, exactly. look, overall, I think we can all agree that these changes are a significant improvement to the original proposal.

Lucy Pentelow (05:47)
Yeah, definitely. I think in particular the removal of the unrealised gains taxation makes the policy more workable and makes superannuation that’s attractive vehicle to build and grow wealth as opposed to the original proposal.

Ishara Rupasinghe (06:01)
Yeah, good point Lucy. Now we’ve talked about the changes, but what hasn’t changed? Firstly, the core threshold remains at three million. Now obviously with indexation going forward, the tax concession, the tax continues to be calculated based on your total superannuation balance across all funds. So not just within a single fund.

And importantly, it’s remaining a personal tax liability. So what I mean by that is the tax is going to be assessed to you as an individual. However, you’re going to get the option ⁓ to either pay the tax from your super balance or from personal funds outside of super. And that flexibility, I think, is important for planning and cash flow purposes.

Lucy Pentelow (06:47)
Yeah, definitely. The Division 296 tax also still applies regardless of whether your super is in the accumulation phase or pension phase. Now, historically, pension phase accounts enjoyed tax-free earnings. This continues to apply, but the Division 296 tax applies to total balances above the threshold, regardless of what phase the individual is in.

Ishara Rupasinghe (07:09)
Yeah, and we should emphasise that there’s still no cap on how much you can hold in superannuation overall. And despite this additional tax for most people with large balances, superannuation is probably going to remain the most tax-effective investment structure. And it’s because the effective tax rates of 30 % and 40 % are likely still quite competitive compared to alternative investment structures when you’re factoring things like personal income tax rates and

capital gains tax outside of super. But look, I think this is a good opportunity for us to go through a simple example of how this tax would actually be calculated under the new rules. Lucy, can you take us through an example?

Lucy Pentelow (07:53)
Yeah, absolutely. So let’s say an individual has a total super balance of $5 million as of the 30th of June, 2026, and it grows to 5.5 million by 30 June, 2027. Now for simplicity of the example, I’m assuming that no contributions have been made and no pension payments have been paid during the year.

The critical point to note that is under the original proposal, that entire 500,000 increase would have been considered earnings, regardless of whether you actually sold any assets or realized those gains. Now under the new proposal, only realized earnings count. So let’s say that of that 500,000 increase in the balance, 300,000 came from actual realized gains. Perhaps the individual was selling their shares, received dividend income or

was receiving rent from a property within their super and the other 200,000 was unrealised growth in assets that they still hold. Now under the new rules only that 300,000 of realised earnings would be used in this calculation.

Ishara Rupasinghe (09:00)
So the first step is calculating your realised gain. So as you said, Lucy, it’s 300,000 in this example. Then you need to work out what proportion of your balance exceeds 3 million. So we’re here, we’ve got five and a half million total at the year end, which means two and a half million is above the threshold. And that represents about 45 % above the threshold, which means 45 % of your $300,000 in earnings is going to

be taxed at 15 % and that equals about $20,250. Now if we compare that to the original proposal where you would have been taxed on the full $500,000 increase, you would have paid in the old design a tax bill of over $34,000.

Lucy Pentelow (09:46)
Yes, the significant difference from from the old proposal. And I guess that’s where the strategic advantage comes in. Because the tax is now based on the realised gains only, individuals have genuine control over whether they trigger those gains. Now, if you’re holding shares that have appreciated substantially, individuals can choose the timing of when to sell and realise the gains. Whereas under the old proposal, you’d be taxed every year on the increase in value, whether you sold them or

Ishara Rupasinghe (10:17)
Yeah, exactly. And as I said before, this change brings Division 296 into line with how capital gains tax normally works in Australia. So you’re only taxed when you actually realise a gain and it removes that unfairness of being taxed on profits you haven’t actually received. And as you said, it eliminates that nightmare scenario where you could be taxed on gains in one year and see those gains disappear in the next with no way to recover the tax that you’ve already paid.

Lucy Pentelow (10:43)
Yeah, it’s definitely a big improvement and like I mentioned earlier, it makes the policy far more workable, particularly those with self-managed superfund holding a liquid assets like property or concentrated shareholdings.

Ishara Rupasinghe (10:55)
Yeah, indeed. Now, while we’ve covered the announced changes, the government has indicated some key areas where further consultation is going to occur. And that’s important ⁓ because this policy isn’t yet finalized. So the first area relates to defined benefit schemes. Of course, these are less common now, but still exist. And me being in Canberra, I certainly see it often enough, people contributing to those older schemes like PSS and CSS.

Now the challenge here is that defined benefit interests don’t have a simple market value. So calculating a total superannuation balance is more complex. Now currently the lump sum value of a defined benefit pension is worked out based on a very simple factor of 16, but this legislation proposes a new method of calculation which factors in variables like age, gender, reversionary status,

which makes it far more complex. So they’re still working through how this is going to work and we’re yet to find out more details on this.

Lucy Pentelow (12:02)
Yeah, it’ll be interesting when they do come to an outcome there. Now, the second area concerns members with overseas superannuation. The question is how to appropriately account for foreign super in the total balance calculation here. So particularly given the different tax treatments and calculation methodologies across different jurisdictions. And the third area addresses structural settlement contributions. So these are specific arrangements often related to personal injury.

claims where funds are contributed to super under special circumstances. So the government is considering whether they should still receive, they should receive different treatments under the Division 296 framework.

Ishara Rupasinghe (12:44)
Yeah, so these are, guess, the things that ⁓ we’re going to find out more about over the coming months. Now, because the draft legislation won’t be released until early 2026, which is obviously still some months away, it does, ⁓ I think, actually work in everyone’s favour because it provides more time for preparation, restructure if needed and proper consultation and refinement.

Now our view remains that investors should continue to implement strategies that have merit in isolation and shouldn’t try to rush into permanent decisions just to address division 296 until we’ve got that final legislation. Basically what I’m saying is don’t make irreversible decisions based on draft policy that’s still evolving. ⁓ Now before we wrap things up and ⁓ given we still have a little bit of time I think

It’s worth going through a couple of frequently asked questions based on some of the client queries we’ve been getting. So Lucy, first question for you, if someone makes a withdrawal during the year to reduce their balance to under 3 million by 30 June, 2027, will they have to pay division 296 considering the formula at the moment adds back withdrawals?

Lucy Pentelow (14:04)
No, so this is a really important thing to note. Your total super balance at the end of each financial year is what matters. So if the balance falls under 3 million by 30 June 2027, the ATO won’t consider that individual in scope for the assessment.

Ishara Rupasinghe (14:20)
that’s an interesting one. So I think that sort of opens up potential strategies ⁓ that people could implement to ⁓ manage ⁓ their position, I think. But again, obviously, we don’t want anyone to rush into these things until we know more. Second question, Lucy, if someone inherits super from their spouse and their balance increases significantly, could that trigger division 296 tax? ⁓

Lucy Pentelow (14:46)
Yeah, definitely. So inherited super will count towards the individual’s total super balance. If the inheritance that’s received pushes them over the $3 million threshold, they’ll be subject to the additional tax. And it’s definitely something that we’re mindful of when talking about estate planning and something that the individual should be very wary of.

Ishara Rupasinghe (15:08)
And last question, how often will account balances be measured and could someone avoid this tax by moving their super to say an industry fund?

Lucy Pentelow (15:18)
Yeah, so firstly, it’s measured annually as of the 30th of June. So your exposure to the tax will vary year on year depending on your balance at that point of time. And then to address the second part of that question, the tax applies to all superannuation funds. So that’s industry funds, retail funds, SMSFs and defined benefits. So because it’s based on your total super balance, not the type of fund you’re in. So switching funds won’t help you with this.

Ishara Rupasinghe (15:45)
Yeah, that’s such an important point. Major structural changes should never be rushed and obviously because there can be ⁓ ripple effects on things like capital gains, tax and estate planning. So it’s something definitely needs to be planned out carefully. And look, with that, I think it’s a good time to wrap up today’s episode. Look, I feel it’s fair to say that while these changes have simplified the original legislation, there’s still a fair bit of complexity and obviously many unknowns.

Now at Evans and Partners, we’re keeping a close eye on developments and we’ll continue to keep everyone updated as things evolve. If you have any questions in the immediate term, no matter how small, please reach out to your advisors because we’re here to help everyone through this. And with that, thank you so much, Lucy, for co-hosting today.

Lucy Pentelow (16:32)
Thanks for having me.

Ishara Rupasinghe (16:34)
And a big thank you to everyone who tuned in. If you found today’s episode helpful, make sure you hit subscribe so you don’t miss future updates. Until next time, take care.