Division 296 Tax: Separating Fact from Fiction in the $3 Million Super Debate
The recent media storm around Division 296 has created more confusion than clarification, leading many Australians to make potentially costly decisions based on misunderstandings.
What we want to do is cut through the noise and get to the facts.
What Division 296 Really Is (And Isn't)
First, let's clear up the biggest misconception: Division 296 is not a tax on your super fund. It's a tax on individuals who have earnings linked to super balances above $3 million.
Second, it’s not a 30% tax on all superannuation earnings once your balance exceeds $3 million. Instead, it applies an extra 15% tax only on the proportion of earnings that relate to the part of your balance above $3 million.
This distinction is crucial for understanding how it might affect you, if at all.
The Real Impact: Breaking Down the Numbers
Here's what you need to know:
The tax applies only to earnings on the portion above $3 million
It's an individual tax, not a fund-level tax
The additional tax rate is 15% on earnings for balances over $3 million
Most Australians won't be affected by this change, at-least not immediately
What Does Division 296 Actually Mean for High Super Balances?
There’s been plenty of noise about the new super tax rules for balances above $3 million, but what does it actually look like in practice? Let’s run through a simple example.
Meet John
John is 65 and has just retired with $4 million in superannuation. Like most retirees, he wants to draw a regular income from his super while continuing to grow his savings for the years ahead.
Here’s how his super is structured:
He starts a pension with the maximum allowed under current rules, $1.9 million (based on today’s Transfer Balance Cap).
The remaining $2.1 million stays in accumulation phase
Let’s assume John’s investments deliver 7% total returns (made up of 4% income and 3% capital growth). This means his super grows by $280,000.
John also draws his required pension minimum of 5% from the pension phase, that’s $95,000 for the year.
How Division 296 Calculates His “Earnings"
Under Division 296, earnings aren’t simply based on income or realised gains. Instead, earnings are calculated using this formula:
Earnings = (Super balance at 30 June this year – Super balance at 30 June last year) + Withdrawals – Contributions
For John:
Opening balance: $4,000,000
Closing balance: $4,280,000 (after 7% growth)
Withdrawals: $95,000 pension drawn
Contributions: $0
His calculated Division 296 earnings are:
($4,280,000 – $4,000,000) + $95,000 – $0 = $375,000
How much Division 296 tax does he pay?
Next, we work out what portion of his balance sits above $3 million:
His total super balance was $4 million at the start of the financial year.
$1 million of that is above the $3 million threshold.
That’s 25% of his balance.
Division 296 tax is applied to 25% of his calculated earnings:
$375,000 × 25% = $93,750 taxable earnings
$93,750 × 15% = $14,062.50 Division 296 tax
Other super tax still applies as normal
In addition to Division 296 tax:
The portion in pension phase remains tax-free.
The accumulation portion ($2.1M) pays normal super fund tax on income and realised gains, which might be around ~$18,900 depending on asset mix.
The bottom line
In total, John’s tax across both the standard super system and Division 296 is about $33,000 on $280,000 of fund growth.
If John had invested the same funds personally (outside super), his tax bill on the same income could have been closer to $47,000 at top marginal rates, and that’s before realising any capital gains.
Even with the new Division 296 tax, super can remain a highly tax-effective structure for building and managing wealth, but the calculations are more complex than most headlines suggest.
Stop the Panic: Why Drastic Actions Could Hurt You
We're seeing concerning trends of people making knee-jerk reactions:
Avoiding accumulating wealth in super, despite it potentially remaining as the most tax effective vehicle for investment
Changing super funds without proper analysis
Withdrawing funds from super prematurely and reinvesting into higher tax environments
Making decisions based on sensationalist headlines
Here's the truth: For most Australians, this tax is completely irrelevant to their financial strategy. For those who are impacted, the alternatives often create a worse outcome.
Smart Strategies for Those Actually Affected
If you are among the those impacted, there are measured approaches to consider:
Spouse contribution splitting strategies - redirecting contributions to a lower-balance spouse can help manage how much of each partner’s super balance counts towards the $3 million threshold over time
Withdrawal and re contribution strategies - withdrawing funds from a higher balance spouse and re contributing to the lower balance spouse (subject to eligibility and caps) can help redistribute superannuation balances more evenly between spouses
Investing personally - Allocating new investments outside of super may help limit future super balance growth, though the effectiveness depends on your overall taxable income and existing personal asset holdings.
Investment Bonds - Investment bonds may offer an alternative long-term, tax-effective structure for wealth accumulation outside of super.
Incurring this additional tax - In some cases, it may be appropriate to simply accept the Division 296 liability where the long-term benefits of remaining invested in super continue to outweigh the additional tax cost.
But here's the critical part: These strategies should only be implemented after careful analysis of your specific situation.
The Media Misfire
Those attention-grabbing headlines about "top 15 funds in the firing line" aren't just misleading, they're potentially harmful. They suggest fund-level impacts that simply don't exist, creating unnecessary anxiety and potentially triggering poor financial decisions.
What You Should Do Now
Check Your Position
Understand your current super balance
Project your likely balance at retirement
Assess whether you're actually affected
If You're Not Affected
Continue your current super strategy
Focus on maximising your contributions
Ignore the sensationalist headlines
If You Are Affected
Seek professional advice
Consider structured splitting strategies
Look at holistic wealth management approaches
The Bottom Line
Making financial decisions based on headlines rather than facts is never a good strategy. The Division 296 changes are significant for a small percentage of Australians, but they require measured, professional responses, not panic-driven reactions.
Take Action (The Right Way)
If you're concerned about how Division 296 might affect your retirement planning:
Get the facts about your specific situation
Consult with qualified financial advisers
Make decisions based on analysis, not headlines
Remember: The worst financial decisions often come from reacting to misunderstood information. At Cooee Wealth Partners, we're here to help you understand exactly how these changes affect you and what (if anything) you need to do about them.
Worried about Division 296? Book a strategy session to understand your real position. BOOK HERE
