Division 296 Legislation Passed

Posted on by Admin

11 March 2026

The new legislation for the controversial Division 296 has passed through the Senate overnight and awaits Royal Assent.  This legislation was released initially for consultation in December 2025, and provided some relief with respect to the taxation of unrealised gains being excluded, with taxable income now the benchmark.  However, there are now some new complexities to consider.

For the most part, the legislation is consistent with the Treasurer’s announcement in October 2025 of a revision to the previously outlined policy, as detailed in our newsletter published 14 October 2025. The passage of the legislation now provides a framework for a deeper analysis of how the tax will affect in-scope individuals.

Key Takeaways

  • There are now two Total Superannuation Balance (TSB) thresholds with different applicable tax rates:
    •  Above $3 million (the Large Superannuation Balance Threshold (LSBT)) – a 15% tax rate on the proportion in excess of $3 million, and
    • Above $10 million (the Very Large Superannuation Balance Threshold (VLSBT)) – a 10% tax rate on the proportion in excess of $10 million (in addition to any tax on with respect to the LSBT
  • The caps will now be indexed, each at the Consumer Price Index (CPI) in $150,000 and $500,000 increments respectively.
  • Determining whether an individual is in-scope will no longer be based on their closing TSB, but the greater of their opening TSB and closing TSB.  This will only apply from 1 July 2027 however, so the 2026/2027 year will still be based on the closing TSB only as a transitional year.
  •  Unrealised capital gains are no longer captured (save for with respect to defined benefit schemes), instead realised earnings will be subject to Division 296 tax.
  •  Realised earnings will largely be based on the Taxable Income of the Fund attributable to each in-scope individual, with adjustments for Exempt Current Pension Income (ECPI) and adjusted realised capital gains.
  • To ensure capital gains that accrued before the new rules commence are not taxed, SMSFs will be able to elect to carry an adjusted cost base, where Division 296 tax will only apply to realised gains since 1 July 2026.
  • The commencement date of the provisions will be 1 July 2026, which means there will be no assessments until the 2028 financial year.
  • The tax will still be levied on the individual, and they will be able to choose whether to pay the tax from their own resources or from their superannuation account.
  • Unlike previous draft legislation, negative Division 296 earnings will no longer be allowed to be carried forward. That is, a bad year won’t bank credits for future years.
  • Individuals who have had a structured settlement contribution made and children receiving a superannuation income stream will not be liable to pay Division 296 Tax.

What’s New

The intention of the legislation remains the same, to reduce the concessions within superannuation to individuals with larger superannuation balances, allowing the concessional treatment of superannuation to be more sustainable into the future.

1.    Formulas

With two new thresholds applying, there are now updated formulas to consider:

The amount that is subject to the 15% tax rate is calculated as follows:

The amount that is subject to the 10% tax rate is then calculated as follows:

Those amounts as calculated then have the relevant tax rate applied to determine the Division 296 tax amount:

As an example:

Peter has the following superannuation balances at the beginning and the end of the 2027/2028 financial year:

The Taxable Income for the 2027/2028 year is $381,250, with net ECPI of $118,750.  This includes $50,000 in franking credits.  So, the Division 296 earnings is $500,000, and the TSB ref amt is the greater of $10.95 million and $12 million, so would be $12 million. 

The calculation for Peter would be as follows:

The amount subject to 15% tax:

The amount subject to 10% tax:

The tax itself is then:

This would be levied on Peter himself, and he could nominate that it is paid from his superannuation fund. 

The Fund itself would be paying tax of $7,187 being $381,250  x  15%, less the franking credits of $50,000. 

So, overall between the Fund and Peter, the tax payable is $71,770 on Taxable Income of $381,250, which equates to an 18.82% effective tax rate. 

2.    Total Superannuation Balance (TSB) used in calculations

As outlined above, the legislation captures the greater of an individual’s TSB at either the start or the end of the financial year, which will then determine whether they are an in-scope person.  This was a new concept from what was announced in October 2025, and has been stated to be an integrity measure, to prevent individuals from making large withdrawals from their superannuation to reduce the tax incidence in that relevant year.  However, as already noted above, in the first year of operation (2026/2027), an in-scope person will only be deemed in-scope based on their TSB at 30 June 2027.

This concept (and outlined in the above formulas as the TSB Reference Amount (TSB ref amt) means that when an in-scope individual’s portion above the two thresholds is calculated, it will be based on the higher TSB of the two, resulting in the portion of earnings to be taxed being the highest possible for the financial year.  This will also capture individuals who may withdraw benefits to fall entirely under the LSBT or VLSBT by the end of the year – they may still be in-scope based on their opening TSB. 

This concept will therefore capture scenarios such as:

  • Individuals with superannuation withdrawals within the year and
  • Where an individual dies and their balance is paid to beneficiaries / estate during the year.  In this regard, it is only the opening TSB in the year of death that is relevant, as once the individual has died, for Division 296 purposes they will no longer have a TSB, so their closing TSB for the year will be nil. 

This adjustment to the TSB rules accounts for the fact that the new formula no longer adds withdrawals back to the calculation of Division 296 earnings, unlike the previous provisions.

There has also been a change the definition of TSB, which for many SMSFs won’t make a difference, as it is the market value of superannuation benefits at year end.  However, for those individuals with a defined benefit interest, or a defined benefit pension, this calculation has changed and needs to be considered.

3.    Capital Gains accrued prior to 30 June 2026

As the Treasurer announced in October 2025, the provisions will only capture realised capital gains from 1 July 2026.  So, unrealised capital gains are now not captured in the earnings calculation (although still factor into the closing TSB, which then determines how much of the realised earnings are taxable).  The mechanism for this is by allowing SMSFs to effectively have an adjusted cost base for directly held assets for Division 296 purposes. 

For SMSFs, this will require the Trustee to make an election by the due date of their 2027 SMSF annual return to carry this adjusted cost base.  The cost base election will be the market value of all investments held by the relevant fund at 30 June 2026. The trustee will not be able to select particular assets to carry an adjusted cost base – it is all or nothing.

This will require careful consideration by fund trustees of the position at 30 June 2026 with respect to making any election.  Where a fund at that time might be in an unrealised loss situation for capital gains tax purposes, it may be appropriate not to make the election.

The election can also be made by any SMSF – regardless of whether the members might be in-scope now or not. It is not a requirement to be “in-scope” now (that is, have a TSB greater than the LSBT) to make the election.  Any SMSF can make it, provided it is made within the time limit and in the approved form (which we are yet to see).

The capital adjustment for large funds will operate differently to SMSFs. An appropriate factor will be determined by the Regulations and the funds realised Division 296 superannuation earnings will be reduced by this factor. This will be done for four consecutive financial years from the commencement of the provisions, as it has been generalised that larger funds tend to only hold investments for this period of time. After the four years has elapsed, there will be no further adjustments for these types of funds with regards to realised capital gains.

Further guidance for how these adjustments will be factored into the superannuation earnings amount will be outlined in Regulations that at the time of writing are yet to be released.

As an example, Paul’s SMSF has the following investments at 30 June 2026:

The Fund elects for a cost base adjustment for Division 296 purposes, which means that all Division 296 realised capital gains (or losses) will be calculated based on the market value of the investments at 30 June 2026. The adjusted cost base will not affect the Fund’s taxable capital gains, which will remain as being calculated using the tax cost base (purchase price), but will affect the Division 296 realised earnings. 

Where the ABC shares and 123 Units (which have been held for longer than 12 months) are sold in the 2026/2027 financial year for $1,400,000 and $400,000 respectively:

In the above example, for tax purposes the assessable income with respect to the asset sales is $350,000 ($600,000 less $250,000), but for Division 296 purposes, the amount that would be factored into the superannuation earnings calculation will instead be $66,666.

It is important to note that the adjusted cost base is only for the assets that a fund owns directly, and not with respect to the underlying assets within an entity that a fund may own.

If for example the Unlisted Property Trust owned property that was acquired at the Trust level for $10 million and was worth $30 million at 30 June 2026, when that property is sold then the full $20 million realised gain in the Trust will be distributed to the unitholders as a taxable capital gain.  That WON’T have an adjustment made to that amount distributed.

4.    Exempt Current Pension Income (ECPI) and Expenditure

Based on the Treasurer’s announcements in October 2025, it was clear that ECPI for funds supporting accounts in pension phase would need to be added back to Taxable Income for the Division 296 calculations. However, it was not clear what would happen to the expenses relating to this ECPI. The legislation clarifies that it will only be the net ECPI that is added back. Allowing a fund to reduce the Division 296 earnings by expenditure that relates to the pension phase, which would not be deductible for tax purposes.

For example, an SMSF utilising the unsegregated method has Taxable Income of $100,000 and deductible expenses of $20,000. The Fund obtains an actuarial certificate to determine the percentage of the total fund income that would be considered ECPI. The actuarial determines the Fund has a tax exempt percentage of 20%. Reducing the Fund’s Taxable Income to $80,000 and the deductions to $16,000, making the net Taxable Income $64,000.  For Division 296 purposes, the net ECPI of $16,000 (the ECPI less exempt component of the deductible expenses) is added back to the Taxable Income to determine the Division 296 earnings of $80,000.

5.    Attribution of Fund Earnings

Each type of fund (SMSF, large or defined benefit) will have a different method with respect to the attribution of earnings for Division 296 purposes.  The three attribution methods are:

  1. Fair and Reasonable attribution (to apply to large funds)
  2. Small Super Fund attribution (to apply to SMSFs)
  3. TSB attribution (to apply to funds that are not linked to market – so are defined benefit schemes).

Clearly the above different methods do not achieve the initial representations of sector neutrality when Division 296 was first announced in February 2023. 

For SMSFs, the attribution of fund earnings to each member will be based on the member’s weighted daily share of the fund balance.  This is similar to the method already utilised within an SMSF to calculate ECPI, where an actuary undertakes the relevant calculation.  This will be clarified in the yet to be released Regulations, with the expectation that an SMSF will be required to obtain an actuarial certificate for this purpose, which may or may not end up with a different approach than an actuarial certificate that might already be issued for ECPI purposes. 

This approach may not be aligned to how profits / losses are attributed on an accounting basis to members, particularly where assets may be segregated or designated particularly to a member’s account. 

6.    Treatment on Death

The draft legislation released in December of the changed approach had a nasty quirk that could mean that a deceased member had ongoing Division 296 liabilities until their superannuation benefits were dealt with.  Many deceased member superannuation benefits are able to be dealt with within a 12 to 24 month period.  However, there are instances where this can take a much longer period of time, and under the previous draft Division 296 obligations would not cease when a member died. 

This has been partly resolved, where an individual’s TSB for Division 296 purposes is nil when they have died.  They may still have an opening TSB for the year of death, and therefore there may still be a Division 296 liability for that year, however there will be no closing TSB for that year.  This brings with it complexity from an estate planning perspective, as the tax liability is for the individual and therefore their estate, which needs to be factored in by the Executor when dealing with the Estate, yet the deceased’s superannuation benefits may have different designated beneficiaries, and so the release of the tax may not be able to be achieved.  

As with the previous version of these provisions in February 2023, the estate planning implications of superannuation and more widely has become a more important consideration for many Australians.  This is particularly relevant for superannuation, where the decision regarding pensions being reversionary or not can have a substantial impact on the Division 296 obligations of individuals

Next Steps

We recommend members who expect to exceed the $3 million threshold by 30 June 2027 seek personalised modelling and advice well before 30 June 2026. 

There are many factors to consider in your particular circumstances, including:

  • It is the closing TSB only in 2026/2027 that will determine the Division 296 liability – therefore if a decision is made to make any substantial withdrawals from superannuation, this could occur in the 2026/2027 year without an adverse impact
  •  If an asset is sold in 2026/2027 rather than before 30 June 2026, for Division 296 purposes with a cost base adjustment, it would only be an increase since 1 July 2026 that would be subject to the tax
  • Updating your estate plan to take into account potential Division 296 liabilities in the year of death 
  • Reviewing your investment strategy and return profiles of investments, and whether they are still suited to superannuation
  • Where a lump-sum, or the transfer of an asset out of superannuation is desirable, consider what alternative structure any money may be invested in
  • Whether to elect for the cost base adjustment to apply (it is for all assets or none of them – not the ability to pick and choose).

If you would like further information about the contents of this newsletter, please contact your Cooper Partners engagement team on 08 6311 6900.


Authors:
Jemma Sanderson, Director
Lindzee-Kate Tagliaferri, Senior Manager

This newsletter is current as of 11 March 2026, however, please note that announcements and changes are being made by the Government and the ATO regularly, and we expect that the tax and business-related responses will continue to evolve.  Before acting upon the content of this newsletter, please contact us to discuss how the above applies to your specific circumstances.

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