The Three Million Dollar Question: Division 296 Explained

Everyone argued about the $3 million super tax for the better part of two years. Almost nobody read what actually passed. Division 296 is now law, it applies from 1 July 2026, and the version sitting on the statute book is meaningfully different from the version that caused all the noise.

That gap matters, because a lot of people are still planning around rules that were dropped. At Aevum Accounting we are having this conversation weekly, both with people whose balances are near the line and with SMSF trustees who are not sure what they need in place. Here is what Division 296 actually does, and the one deadline that has already quietly gone past.

Prefer to listen? We covered this in The Three Million Dollar Question: Division 296 Explained, episode 53 of the Aevum Accounting Podcast.

It is law, and the first year is the one we are in

Division 296 applies from 1 July 2026, so the first income year it touches is 2026-27, the year we are in right now. The first assessments will not land for a while: the ATO has said assessments for 2026-27 will begin issuing in the second half of the 2027-28 income year.

That lag reads like breathing room. It is not, because the decision that matters most depends on a valuation date that has already passed.

What it actually taxes

Division 296 applies an extra 15% to a portion of your superannuation earnings. The portion is worked out by how far your total super balance sits above $3 million. There is a second tier as well, with a further 10% applying to earnings attributable to a balance above $10 million, so at the very top you are looking at 25% extra rather than 15%.

Here is the part that gets reported badly. This is not a tax on your balance. It is a tax on earnings. Your balance is only used to work out what proportion of those earnings gets caught.

The numbers, worked through

Someone with $3.5 million. Their balance is $500,000 above the threshold. Divide that excess by the total balance and you get about 14.3%, so 14.3% of their earnings is caught. On $200,000 of earnings that is roughly $28,580, and the extra tax is 15% of that: about $4,290 for the year.

Someone with $6 million. They are $3 million above the threshold, divided by $6 million, which is 50%. Half their earnings are caught. On $400,000 of earnings that is $200,000, taxed at an extra 15%, so $30,000.

It scales with how far above the line you sit. Crossing $3 million by a dollar does not suddenly tax everything, it produces a negligible amount. One dollar over is not a cliff.

What counts in your balance

Everything. All of your superannuation interests added together, across every fund: self-managed, retail, industry and defined benefit interests. Amounts under a limited recourse borrowing arrangement are disregarded for this particular tax.

The timing test matters too. For 2026-27 it is your balance at the end of the year. From 2027-28 the calculation uses the greater of your balance just before the start of the year and your balance at the end of it, so a balance that falls during the year does not necessarily rescue you.

The unrealised gains backflip

This is the one that made headlines, and it is the biggest single reason the law is not what most people think it is.

The original design would have taxed you on paper gains, on growth you had not sold and had not received. That did not become law. The final version builds what the legislation calls fund earnings from an adjusted amount of the fund's taxable income. In plain English, it follows income and realised gains, the same way the fund's ordinary tax return does. For funds holding a farm, a commercial property or a business premises, that changes everything: the nightmare scenario of a tax bill on a paper valuation with no cash to pay it is largely gone.

One honest caveat. Your total super balance is still a market value figure, so unrealised growth still pushes you over the threshold and still increases the proportion caught. It is the earnings base that is built on realised amounts, not the balance.

The other fear, that the thresholds would stay frozen and quietly capture ordinary balances over twenty years, did not survive into the final law either. Both are indexed in line with CPI, the $3 million in $150,000 increments and the $10 million in $500,000 increments.

The capital gains tax election, and the date that has already gone

If you have a self-managed fund, this is the most practically important part of the whole regime.

A fund can elect to reset the cost base of its assets to their market value as at 30 June 2026, so you are not caught on growth from the years before this tax existed. Without it, a gain built up over twenty years could be swept in when you eventually sell.

The election itself is made later, by the due date of your fund's annual return for 2026-27. But the valuation it depends on is as at 30 June 2026, and that date has passed. If your fund does not have proper, defensible market values as at that date, that is a problem that gets harder to fix every month. The action today is not the election, it is the evidence: property, unlisted investments, business real property, anything not publicly priced.

Four conditions 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.

It cannot be revoked. A one-way door is a decision to model, not a box to tick.

It generally only reaches assets the fund holds directly. Assets held through a structure such as a unit trust are generally outside it, with an exception for custodian and look-through arrangements. If your fund invests through a structure rather than owning the asset outright, do not assume the reset reaches it.

The election is not lodged with the ATO, but the fund must keep cost base records for every asset it applies to. It also operates only for Division 296 purposes, so it does not reset cost bases for the fund's ordinary capital gains position.

What trustees and members need to know

Although the tax is assessed to the individual, the fund does the reporting. A self-managed fund works out its earnings, attributes a portion to each affected member, and reports that figure in the annual return from 2026-27 onwards. Outside a few exceptions an actuary will generally need to be engaged to work out the attribution, so build that into your cost and timing expectations.

The assessment itself is issued to you personally, not to your fund. You can either pay it with your own money or ask for the amount to be released from your super, which is what stops the tax forcing people to find cash they do not have outside the fund.

Super is still the lower-taxed environment

The extra 15% sits on top of the 15% the fund already pays, so on the caught portion you are at 30%, and at the very top tier 40%. Against a top marginal rate of 45% plus the Medicare levy, super is still the lower-taxed environment. Those are headline rates and the picture shifts for retirement-phase earnings, which is exactly why this calls for modelling rather than a rule of thumb.

Lower, but not by as much as it used to be. Pulling money out purely to avoid this tax can easily leave you worse off once you are paying your marginal rate on those earnings instead.

What to do now

Work out whether it touches you at all. Add up every superannuation interest you hold across every fund, not just the big one.

If you have a self-managed fund, document your 30 June 2026 market values. That evidence underpins the election and it does not get easier to gather with time.

Model the election before you make it. All assets, one deadline, and no way back once it is done.

If you are close to the line, look at your contributions and how balances are split between a couple. Small adjustments made early are worth far more than big ones made late.

Do not act on the version of this tax that did not become law. This is the second big change in a year that people are still getting wrong, after the negative gearing shake-up.

If your balance is anywhere near $3 million, or you are a trustee wondering what you need to have in place, book a consultation with our team and we can model your position and walk you through the election. Our SMSF accountants in Perth work with trustees right across Australia.

The information in this article is general in nature and does not take into account your personal circumstances. It does not constitute specific tax or financial advice. Everyone's situation is different, so we recommend speaking with a qualified professional at Aevum Accounting before acting on anything you have read here.