The Basics
As you may know, back in the 2023-24 federal budget the Government announced additional taxes for those with high superannuation balances (over $3mil). After public consultation and a large amount of pushback on how those rules operated, the Government wasn’t able to secure enough votes to pass it into Law – so it had to go back to the drawing board.
Fast forward a few years, the Government made some common sense changes to the rules (mainly around taxing unrealised gains) and they were able to get a deal done with the Greens to get these rules into law – and they passed Parliament on 10 March 2026.
You may hear reference to “Div 296 tax” or similar in the media – Div 296 is the division number inside of the tax legislation that this new tax will occupy. We won’t refer to it as this, but if you ever hear “Div 296”, it is referring to the new $3mil super tax.
What Are The New Rules
A simple breakdown of these rules is:
- Start date of 1 July 2026
- Individuals with more than $3mil in super will be hit with an additional 15% tax, increasing the effective tax rate to 30%
- Individuals with more than $10mil in super will be hit with an additional 25% tax (the above 15% plus 10% more), increasing the effective tax rate to 40%
- This tax is only levied on “realised” earnings (the previous version sought to tax unrealised earnings – i.e. value increases on assets not yet sold)
- Contributions into super do not attract this additional tax
- The additional tax is not levied on the entire earnings, just the proportion that represents the “above the cap” amount
- This additional tax is levied on the individual, but they can elect to have the tax paid by the superannuation fund
- Testing of the $3mil and $10mil thresholds is done at both the start and the end of the financial year (i.e. whichever is higher)
Bob has $4mil inside his super at 1 July 2026, fully invested in a term deposit earning 5% that matured on 30 June 2027. On 30 June 2027, the super fund will earn $200k of interest.
As Bob’s super balance is over $3mil at either 1 July 2026 or 30 June 2027 (it’s over at both points, but you only need to be over at one of the two), he will attract the additional tax brought in by these new rules.
Bob has, as of 30 June 2027, $4.2mil in super (the original $4mil plus the $200k interest). $1.2mil of his super is above the $3mil cap – which represents 28.57% of his total $4.2mil balance. Therefore, 28.57% of the interest will attract the additional 15% tax.
The total tax position will be as follows:
- Ordinary Tax: Bob’s super fund will receive a tax bill for $30k – being $200k taxed at the ordinary 15% tax rate that applies to super funds.
- New $3mil Cap Tax: Bob will receive a tax bill for $8,571 – being $200k x 28.57% x the additional 15% tax rate. Bob will be able to elect for his super fund to pay this tax if he chooses to.
How The Tax Is Levied
It’s important to understand how this tax is levied, because it’s backwards at first glance.
When your super fund lodges its tax return and reports to the ATO that this new tax applies to your superannuation – the ATO DOES NOT charge your super fund this tax. Instead, the ATO will send you a personal tax assessment and ask you to personally pay the amount of this tax within 84 days.
Yes, you read that right. You personally get hit with the tax.
You are allowed to elect that your super fund pays this tax (i.e. elect to release money from your superannuation fund for this tax), which requires a form to be submitted to the ATO within 60 days. Once submitted, the ATO will then write to your superannuation fund for them to pay this tax (and importantly, your super fund should NOT make payment until they receive this letter).
Some Complications
Of course, no set of tax laws would be complete with complications. Below we go through some of those and what it means for you.
Contributions Are Excluded From "Earnings"
The intention of the rules is to tax profits at 30% (or 40%), and not contributions. For this reason, when calculating “earnings” for the purposes of this tax, taxable income is reduced by the amount of concessional contributions received.
Steven has $4mil in super (and therefore attracts this new tax) and earned $100,000 profit on investments plus his super fund received $30,000 of concessional (taxable) contributions from a combination of his employer and personal contributions.
Total taxable income of the super fund is $130,000, however the purposes of this tax, it is $100,000. The total tax breakdown will be:
- Ordinary Tax: Steven’s super fund will receive a tax bill for $19,500 – being $130k taxed at the ordinary 15% tax rate; and
- New $3mil Cap Tax: Steven will receive a tax bill for $3,750 – being $100k x 25% x the additional 15% tax rate. Steven can elect to have this paid by his super fund.
Pension Recipients
One of the great perks of super is that when you are in “pension mode” (i.e. receiving a pension), the income earnt within your super fund is tax-free to the extent that those earnings relate to your pension. This means that if you have your entire super in “pension mode”, you are paying 0% tax inside super, and paying 0% tax when you withdraw it from super (assuming you are over 60).
This new 15% tax (or 25% tax if you have over $10mil) will still apply to the income earned by your super fund – even if it relates to your pension.
Let’s expand on Bob’s example from earlier ($4mil in super, $200k interest income), and now let’s imagine that Bob had started a pension and allocated $1.5mil to that pension.
The super fund still earns $200k of income, but because $1.5mil is allocated to a pension, the income associated with this $1.5mil is tax-free under the “normal” super rules. $1.5mil is 35.71% of the total $4.2mil – and therefore 35.71% of the total interest is tax-free under the pension rules.
The total tax position will be as follows:
- Tax-Free: $71k of the interest will be tax-free – being $200k x 35.71%
- Ordinary Tax: Bob’s superannuation fund will receive a tax bill for $19k – being $129k ($200k – $71k) taxed at the ordinary 15% tax rate that applies to super funds.
- New $3mil Cap Tax: Bob will receive a tax bill for $8,571 – being $200k x 28.57% x the additional 15% tax rate. Bob will be able to elect for his superannuation fund to pay this tax if he chooses to.
Non-Arms Length Income
Given this is rare, most people aren’t familiar with this rule – but where your super fund earns “non-arms length income”, that income is currently taxed at 45%. This typically arises when your super fund is given a sweetheart deal by a related party as a way of trying to manipulate things.
Because this income already attracts the top tax rate, this new 15% (or 25%) tax does not apply to this income.
Jeff’s super fund consists of a non-arms length investment in a private company (let’s say Jeff got an amazing deal on the initial investment and the ATO has looked at it and decided it’s not above board and the penalty tax rate applies). This investment earned $100k of income for the super fund during the year.
Even without this new $3mil tax, Jeff’s super fund would pay 45% tax on that $100k – being $45k. Because this penalty rate is already higher than the new $3mil tax, it won’t matter if Jeff’s total super balance is $1mil or $100mil – no additional tax would be paid.
Death of a Member
Upon the death of a member, their total superannuation balance is deemed to be $0. However, this doesn’t mean this new tax goes away…
In the year that someone passes away, because the rules use the higher of a persons total super balance at the start and end of the year, if the deceased has a total super balance of over $3mil at the start of the year, this tax still applies to them in the year they passed away.
Given that the ATO levy this tax on the individual and not the super fund, this also brings in a added complication for executors of their estate – as they must wait until the ATO issue this notice of assessment before they can finalise the estate.
Assets Held at 30 June 2026
If you’ve never heard of the term “grandfathering” in the context of new tax rules, it basically means that the impact of the new rule will not be backdated and it will only apply from this date forwards. In this context, it means only earnings from 1 July 2026 are captured.
If you think of existing assets, these have increased in value over time – a period of time where these rules did not exist – and if sold after 30 June 2026, the entire profit is subject to this tax unless grandfathering applies because gains are only taxable when the asset is sold.
Thankfully, (for the purposes of this new tax,) the Government will allow you to elect to avoid tax on the increases to the market value of assets accumulated before 30 June 2026, and will in effect lock in your “cost” of those assets as its market value as of 30 June 2026.
Important: This election has a fixed end date – the due date of your 2026 superannuation fund tax return. Once this date passes, you can never choose to take advantage of the grandfathering rules. Even if your superannuation balance is under $3mil, you should perform this election now as it can’t be done later. This also means getting valuations done on all of your SMSF assets this year.
Sue’s super fund consists of a property in her super fund which was purchased 30 years ago for $100k and is now valued at $4mil. Because the value of the super fund is over $3mil, this new tax applies to Sue’s super fund.
If Sue sells this property on 1 July 2026 (i.e. one day after this new tax becomes effective), her super fund will report a capital gain of $3.9mil – being the sale price less purchase price. One-third of this capital gain will be tax-free due to the capital gain discount (super funds don’t get the full 50% discount, instead getting a one-third discount), leaving $2.6mil as taxable.
If Sue does not make an election…
The full $2.6mil capital gain will be subjected to the new tax. Sue’s total super balance is $4mil, and $1mil (25%) is over the cap and therefore 25% of the capital gain will be taxed at the additional 15% rate. The tax calculations look like the following:
- Ordinary Tax: Sue’s super fund will receive a tax bill for $390k – being $2.6mil taxed at the ordinary 15% tax rate that applies to superannuation funds; and
- New $3mil Cap Tax: Sue will receive a tax bill for $97.5k – being $2.6mil x 25% x the additional 15% tax rate. Sue will be able to elect for her super fund to pay this tax if she chooses to.
If Sue chooses to make an election…
As the entirety of the increase in value of this asset occurred prior to 30 June 2026, All of the gain is excluded for the purposes of the new $3mil tax. The updated tax calculations look like the following:
- Ordinary Tax: Sue’s super fund will receive a tax bill for $390k – being $2.6mil taxed at the ordinary 15% tax rate that applies to superannuation funds; and
- New $3mil Cap Tax: Sue will not receive a further tax bill for this new tax.
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As you can see from the above, electing to use the grandfathering rules mean Sue isn’t paying additional tax on the earnings that accumulated prior to 30 June 2026.
What You Need To Do!!
Everyone
You should consider strategies that look to move superannuation from one spouse to another. Acting before 30 June 2026 would be vital if you are already over the $3mil (or $10mil) threshold.
If the $3mil tax applies, you should be constantly assessing whether the effective 30% tax rate your super is attracting is better or worse than your personal tax rate. If you are personally paying 45% tax, paying 30% inside superannuation is still a better option and, like it or not, simply doing nothing might be the most tax-effective choice. On the other hand, if your personal income drops and you are not paying much personal tax, you may be best served withdrawing a chunk of super and investing it in your personal name and paying less tax on your personal tax return.
If You Have A SMSF
We believe it would be prudent for everyone with a SMSF to submit an election to have the “cost” of all assets reset to their market value as of 30 June 2026 unless their assets are in a loss position (i.e. have decreased in value). We note that it is a “one-in all-in” election, you can’t pick and choose which assets it applies to.
It doesn’t matter what your super balance is today as you never know what the future holds and if there is even the slightest chance that doing this will save tax in the future, it’s worth getting it done. We will be writing to all our SMSF clients with more info as we know what that election looks like.
If making the election, you need to revalue all of your SMSF’s assets. We highly recommend getting actual valuations done and don’t rely on estimates as this reduces the risk of an ATO challenge. The valuation date needs to be 30 June 2026.
We can (and do each year) value all shares, EFT’s, and managed funds based on their price on the ASX – for all other assets you will need to engage a valuer as close to 30 June as possible.
If Your SMSF Is Invested In Private Entities
If you are invested in private entities, it is in your best interests to work with that entity to obtain a valuation. It may be that they provide a valuation from their accountant, or engage a valuer to revalue the assets in the entity (particularly relevant for entities holding property). While the execution of the valuation may be outside of your control, you should at least be asking the question as it can save a lot of headaches in the future.
Consult with your advisor
Lastly, see your trusted advisor.
We would strongly encourage everyone with a superannuation balance over $2.5mil to consult with their accountant ASAP on these new rules. Even if you have less than this but hope to one day get to that cap, making a plan early is the best way to ensure you don’t pay more tax than you need to.
As with all generalised articles and advice, you should seek our your professional advisor before acting on anything within this article (or anything else you hear or read). Laws are often more complicated than how they are outlined in articles like this (simply to make it easier to digest) and there may be things you are not aware of that could impact on how these rules apply to you, or what other rules and laws might be impacted.