Final Division 296 Legislation Means it’s Time to Act Sooner than Later

When the Government reworked Division 296 in late 2025, many of the most concerning features of the original proposal were softened. Unrealised gains were removed, thresholds were tiered, and the start date was pushed back to 1 July 2026.

At the time, it appeared there was breathing room — and many advisers reasonably assumed affected clients could be reviewed closer to 2027.

However, the final legislation released on 19 December 2025 has changed how Division 296 operates in practice. While the headline policy remains, the mechanics are more complex and, for many SMSF members, more restrictive than first expected.

What hasn’t changed

The fundamentals remain the same:

• Division 296 applies to individuals with total super balances over $3 million
• An extra 15% tax applies to earnings above that threshold
  (with higher rates for very large balances)
• The start date is still 1 July 2026
• The $3 million threshold will be indexed over time

These points have been communicated previously and remain unchanged.

What has changed – in plain English

The final drafting introduced several changes that materially affect how and when the tax applies.

1. It’s no longer just about your 30 June balance
Exposure to Division 296 is no longer determined solely by your balance at year-end.
If your super balance is higher at the start of the year than at the end, that higher figure can still be used in the calculation.
This means temporary balance spikes may now trigger tax, even if balances later fall.

2. Calculations are more complex, especially for SMSFs
While the $3 million threshold itself is still a point-in-time test, the earnings calculation now uses averaged balances over the year.
For many SMSFs, this will require actuarial input and more detailed reporting than previously needed.

3. Less flexibility for SMSFs
SMSFs must now use a single proportional method to attribute earnings for Division 296.
This removes the ability to use different strategies for different assets and limits flexibility that previously existed.

4. CGT concessions are possible – but only if you opt in
SMSFs can elect to recognise capital gains tax discounts in the calculation — but only if they meet additional record-keeping and reporting requirements.
This adds complexity and may not be practical for all funds.

5. Franking credits remain an issue
Franking credits increase “earnings” for Division 296 purposes, but there’s no adjustment for tax already paid at the company level.
This can result in an effective “tax on tax”, particularly impacting SMSFs with high Australian shareholdings.

Why we’re raising this again — and why timing matters

Although Division 296 doesn’t start until 1 July 2026, the way the rules now work means:

• balances and transactions in 2025–26 can directly affect outcomes, and
• many strategies need to be considered before 30 June 2026, not after.

This may include:

• reviewing contribution strategies,
• restructuring pensions,
• balancing super between spouses,
• reviewing asset timing, and
• assessing whether your SMSF administration is fit for purpose.

Waiting until 2027 may mean losing options that are still available today.

The key takeaway

The final Division 296 rules are:

• clearer than the original proposal, but
• more complex and more restrictive than initially expected.

For clients approaching or exceeding the $3 million threshold — particularly those with SMSFs — this is not just a new tax. It’s a shift in how super needs to be planned, managed and administered.