The Three Million Dollar Question: Division 296 Explained

Episode 53: The Three Million Dollar Question: Division 296 Explained Mia: Welcome to the podcast, our newsletter made easy. Please note, this podcast features AI-generated voices for your hosts, Mia Taylor Leo: and Leo Baker, bringing you expert insights from the team at Aevum Accounting. Each week, we're here to help you confidently navigate the ins and outs of Australian tax, whether it's for your individual finances or the complexities of your business. Mia: We'll cut through the jargon to give you strategies for compliance, smart planning, and that ultimate peace of mind. Leo: So, if you're looking to understand your obligations, maximise your financial position, or simply gain clarity on your money matters, you're in the right place. Let's get started with our review of the week! Mia: This one comes from Sam, who says: always a great experience with the team. These guys have things organised in a way which is simple to work with, while still maximising your return. Leo: Thank you, Sam. And organised in a way which is simple to work with is exactly what today's episode needs to be, because we are tackling the most talked-about change to superannuation in a decade. Mia: The three million dollar super tax. Leo: Also known as Division 296. And here is the headline. It is no longer a proposal, it is no longer a draft. It is law, and it started on the 1st of July, 2026. Which means the first year it applies to is the year we are in right now. Mia: So while everyone was arguing about it, it quietly commenced. Leo: It did. And to walk us through it properly we've brought back our tax strategist, Harvey Green. Harvey, welcome back. Harvey: Thanks, Leo. And you're right that the argument overshadowed the detail. A lot of people switched off during the debate and have not looked at what actually passed. The version that became law is meaningfully different from the version that made everyone angry. Mia: Okay, start me at the beginning. What is it? Harvey: From the 1st of July, 2026, Division 296 reduces the tax concessions available to people with very large superannuation balances. It applies an extra fifteen per cent to a portion of your superannuation earnings, and that portion is worked out by how far your total super balance sits above three million dollars. Leo: And there's a second tier. Harvey: There is. An additional ten per cent applies to the earnings component attributable to a balance above ten million dollars. So at the very top you're looking at twenty-five per cent on top, not fifteen. Mia: And I want to be precise here, because I've seen this reported badly. It's not a tax on your balance. Harvey: Correct, and that is the single most common misunderstanding. It is a tax on earnings, not on the balance itself. The balance is only used to work out what proportion of your earnings gets caught. Leo: Give me the shape of that. Harvey: If your total super balance is a long way above three million dollars, a large proportion of your earnings is caught. If you're just over the line, only a small proportion is caught. Cross the threshold by a dollar and you are not suddenly paying extra tax on everything. Mia: Can you put numbers on that? I think it only really lands with numbers. Harvey: Let's take two people. The first has a total super balance of three and a half million dollars at the end of the year, and their fund earned two hundred thousand dollars. Leo: So half a million dollars above the threshold. Harvey: Right. And the calculation takes that excess and divides it by the total balance. Five hundred thousand over three and a half million is about fourteen per cent. So fourteen per cent of their earnings gets caught. Mia: Fourteen per cent of two hundred thousand. Harvey: Which is roughly twenty-eight thousand dollars. And the extra tax is fifteen per cent of that. So about four thousand three hundred dollars for the year. Leo: On a two hundred thousand dollar earnings year. That is not nothing, but it is a long way from the numbers that were being thrown around. Harvey: It isn't nothing, and I don't want to minimise it. But it is very different from what people picture when they hear three million dollar super tax. Mia: Now give me the second person. Harvey: The second has six million dollars, and their fund earned four hundred thousand dollars. Three million above the threshold, divided by six million, is fifty per cent. So half their earnings are caught. Two hundred thousand dollars, taxed at an extra fifteen per cent, is thirty thousand dollars. Leo: So it really does scale with how far above the line you sit. Harvey: That's the design. And it is why the person just over the threshold and the person well over it are having two completely different conversations. Mia: Okay, that helps. So what counts as your total super balance? Harvey: Everything. All of your superannuation interests added together, across every fund. Self-managed funds, retail funds, industry funds, and defined benefit interests. There is one useful carve-out. Amounts under a limited recourse borrowing arrangement are disregarded when working out your balance for this particular tax. Leo: And the timing test? Harvey: For this first year, the 2026-27 income year, it's your total super balance at the end of the year that matters. For the years after that, it applies if your balance exceeds the threshold either just before the start of the year, or at the end of it. Mia: Now, the thresholds. Are they frozen? Because that was one of the big complaints. Harvey: No, and this is one of the changes worth knowing about. Both thresholds are indexed. The three million dollar threshold moves in one hundred and fifty thousand dollar increments, and the ten million dollar threshold moves in five hundred thousand dollar increments. Leo: So it won't quietly capture ordinary balances over twenty years the way it would have unindexed. Harvey: That was the concern, and indexation addresses it. Mia: Right. Now let's get to the part everybody argued about. Unrealised gains. Leo: This is the one that made headlines. The original design would have taxed you on paper gains. Growth you hadn't sold and hadn't received. Harvey: And that is not what became law. The final version calculates what the legislation calls fund earnings from an adjusted amount of the fund's taxable income. In plain English, it is built on realised earnings. Mia: So if a property in the fund goes up in value and you don't sell it, that increase isn't taxed? Harvey: Not under the version that passed. The tax follows income and realised gains, the same way the fund's ordinary tax return does. That was the single biggest change between the draft that caused the uproar and the law we now have. Leo: Which matters enormously for funds holding a farm, a commercial property, or a business premises. Harvey: It does. The nightmare scenario people described was a farmer facing a tax bill on a paper valuation with no cash to pay it. The final design largely removes that problem, because if nothing has been sold, there is generally no realised earning to tax. Mia: I feel like a lot of people still think the old version is the law. Harvey: A great many do. And that misunderstanding is causing people to make decisions they may not need to make. Leo: Alright. Harvey, this next part is the one I most want listeners to hear, because there is a genuine deadline attached and it's already behind us. Harvey: The capital gains tax adjustment. And Leo is right to flag it, because this is the most practically important thing in the whole regime for anyone with a self-managed fund. Mia: Okay, this sounds like the important bit. Walk me through it. Harvey: A self-managed super fund can elect to reset the cost base of its assets to their market value as at the end of the 30th of June, 2026. The purpose is to recognise the value that accrued before this tax ever started, so you aren't taxed on growth that happened in the years beforehand. Leo: So without the election, a gain built up over twenty years could be caught when you eventually sell. Harvey: In substance, yes. The election draws a line in the sand at the 30th of June, 2026, and says everything below that line belongs to the old world. Mia: And the date has passed. Harvey: It has. Which is exactly why we're doing this episode now. The election itself is made later, by the due date of your fund's annual return for the 2026-27 income year. But the valuation it depends on is as at the 30th of June, 2026. If your fund does not have proper, defensible market values as at that date, you have a problem that gets harder to fix with every month that goes by. Leo: So the action today isn't the election. It's the evidence. Harvey: Precisely. Get your valuations documented now, while the information is still fresh and obtainable. Property, unlisted investments, business real property, anything not publicly priced. Mia: And a few conditions on the election itself? Harvey: Three that matter. It applies to all of the fund's capital gains tax assets held at that date, not a selected few. It must be made by the due date of the 2026-27 annual return. And, importantly, it cannot be revoked. Leo: And there's a limit on which assets it reaches, isn't there? Harvey: There is, and it catches people out. It generally only applies to assets the fund holds directly. Assets held indirectly, say through a unit trust, are generally outside it, with an exception for custodian and look-through arrangements like the trust in a limited recourse borrowing arrangement. So if your fund invests through a structure rather than owning the asset outright, do not assume the reset reaches it. Leo: Cannot be revoked. So it's a one-way door. Harvey: It is. Which means it is a decision to model, not a box to tick. For most funds sitting on substantial accrued gains it will be clearly worthwhile. But it is not automatically the right answer for every fund, and you want that worked through properly before you commit. Mia: What about the paperwork? Harvey: The election doesn't get sent to the tax office. But the fund must keep records of the cost base of every asset it applies to, and hold those records for five years after it becomes certain no further capital gains tax events can happen for those assets. Leo: Let's talk about what trustees actually have to do each year. Harvey: Although the tax is assessed to the individual, the fund does the reporting. A self-managed fund works out its fund earnings for the year, attributes a portion of that to each affected member, and reports that figure in the fund's annual return, starting with the 2026-27 return. Mia: And if the trustee doesn't report it? Harvey: The tax office will notify them, and the return will have to be amended. If you have a tax agent, that notification goes to the agent. Leo: There's an actuarial element too, isn't there? Harvey: There is. How the earnings get attributed to a member depends on whether their interest is an accumulation interest or a defined benefit pension. Outside of a few exceptions, such as where the fund's earnings are nil, an actuary will generally need to be engaged to work out the amount. So build that into your cost and timing expectations. Mia: Now, the question everyone actually wants answered. Who pays the bill, and how? Harvey: The assessment is issued to you personally, not to the fund. The first assessments for the 2026-27 year are expected to begin issuing in the second half of the 2027-28 income year. Leo: And you can pay it from super? Harvey: You can. You either pay it personally from your own money, or you ask for the amount to be released from your superannuation. That release option is what stops the tax forcing people to find cash they don't have outside the fund. Mia: Alright Harvey, let's bust a few myths, because there are plenty flying around. Harvey: Please. Mia: Myth one. This is a tax on your super balance. Harvey: No. It is a tax on a portion of your earnings, and your balance only determines the size of that portion. Mia: Myth two. It taxes gains you haven't sold. Harvey: Not in the law that passed. Fund earnings are built from an adjusted amount of the fund's taxable income. Mia: Myth three. The thresholds will never move, so eventually everyone gets caught. Harvey: Both thresholds are indexed, in one hundred and fifty thousand dollar and five hundred thousand dollar steps. Mia: Myth four. If I'm one dollar over three million dollars, I get slugged on everything. Harvey: It scales. One dollar over produces a negligible amount, not a cliff. Mia: And myth five. There's nothing I can do about it anyway. Harvey: That one is the most expensive of the five, because there genuinely are decisions to make. The capital gains tax election is the obvious one. Beyond that, how contributions are directed within a couple, whether balances between two members are unnecessarily lopsided, and whether particular assets are best held inside superannuation at all. None of those are things to guess at. Leo: And the reverse point is worth making too. Superannuation is still a very concessionally taxed environment. Harvey: That's important, and it's worth putting real numbers on it. Remember this sits on top of the fifteen per cent the fund already pays. So on the caught portion you're at thirty per cent, and at the very top tier you're at forty per cent. Compare that to the top marginal rate of forty-five per cent plus the Medicare levy, and superannuation is still the lower-taxed environment. Leo: Lower, but not by as much as it used to be. Harvey: Exactly right, and that's the honest way to put it. The gap has narrowed, it hasn't closed. Pulling money out of superannuation purely to avoid this tax can easily leave you worse off once you're paying your marginal rate on those earnings instead. The right answer is modelling, not reflex. Mia: Alright, let's land this. What should people actually be doing? Leo: First, work out whether this even touches you. Add up every superannuation interest you hold, across every fund, not just the big one. Harvey: Second, if you have a self-managed fund, get your market values as at the 30th of June, 2026 documented properly. That evidence underpins the capital gains tax election and it does not get easier to gather with time. Mia: Third, model the election before you make it. All assets, one deadline, and no way back once it's done. Leo: Fourth, if you're close to the line rather than over it, look at the shape of your contributions and how balances are split. Small adjustments made early are worth far more than big ones made late. Harvey: And fifth, don't act on the version of this tax that didn't become law. A lot of people are still planning around the unrealised gains model that was dropped. Mia: Which is a very good note to end on. The rules that passed are not the rules people argued about. Leo: If your balance is anywhere near three million dollars, or you're a trustee wondering what you need to have in place, the team can model your position and walk you through the election. Mia: Head to aevumaccounting.com.au and book a planning session. Leo: And if there's a topic you'd like us to break down, we'd love to hear it. You can reach the team at Aevum Accounting at aevumaccounting.com.au. Mia: Before we go, a quick but important reminder. The information shared today is for general informational purposes only, and does not constitute specific tax or financial advice. Leo: Everyone's situation is unique, and tax laws are complex. For personalised advice tailored to your situation, we always recommend consulting with a qualified professional. Mia: Until next time, stay savvy, stay proactive... Harvey: And get those valuations sorted!