From 1 July 2025, superannuation balances above $3 million may face additional tax under Division 296 (Div 296).
If the legislation passes through the Senate, Australians with superannuation balances above $3million would be taxed an additional 15% on the earnings attributable to the portion of their balance above the $3 million threshold. If passed, this tax could reshape long-term retirement strategies for individuals and SMSFs alike.
This proposed 15% tax on the earnings is in addition to the existing 15% tax on concessional earnings within the fund. This means affected individuals could be taxed at a combined rate of up to 30% on some of their super earnings. Importantly, the calculation includes both realised and unrealised gains, which has sparked debate over fairness and valuation complexity. The Australian Taxation Office (ATO) will oversee the calculation of the new tax, using a formula that captures the movement in your total super balance across financial years.
A Div 296 Practical Example
The tax applies only to the portion of your total super balance that exceeds $3 million. The ATO will calculate this using a proportionate earnings formula, even if no money is withdrawn from the fund.
Let’s say your total super balance is $3.5 million on 30 June 2025, and $4 million on 30 June 2026. Approximately 25% of the gain is above the $3 million threshold, and therefore, 25% of the gain would be subject to the additional 15% Division 296 tax.
SMSFs are not excluded. Many SMSF trustees are more likely to be affected due to their higher average balances and concentrated asset holdings. Subject to certain conditions, withdrawing funds to bring your super balance below $3 million before 1 July 2025 may reduce or eliminate your Div 296 tax liability.
What options can investors consider?
Income assets, like bonds, will help manage a higher tax bill arising from Div 296 tax liability. Investment-grade bonds, with very low credit default risks, tend to be used for income purposes (i.e. not for unrealised/realised gains) and will be Div 296 tax effective. For example, investment-grade floating rate bond prices are reset back to par at the end of the 3-month coupon period, so investors collect the 3-month coupon without any unrealised/realised gains to recognise (assuming investors bought around par).
Currently, investment-grade floating rate bonds also offer a higher income than cash and term deposits, where rates have already dropped on the expectation of RBA rate cuts. This makes it an even more attractive proposition for SMSFs and individuals to consider the switch from cash and term deposits in the short term.
Please speak to an IAM sales representative who can provide some investment-grade floating rate bond opportunities.
