What does the new super tax mean for people with larger balances?

People with more than $3 million in superannuation are being encouraged to understand a new tax regime that began this financial year, with the first assessment based on balances at 30 June 2027. Financial planning strategist Colin Lewis outlined Division 296 during an FTS Financial Planning Federal Budget seminar in Young, saying some people who may be affected were still unaware the new tax existed. Division 296 applies from the 2026–27 financial year and reduces superannuation tax concessions for people with total super balances above $3 million. It became law in March this year. The $3 million threshold applies to an individual’s total superannuation balance and is indexed from 2027–28. A second threshold begins at $10 million, which is also indexed in later years. Under the new law, Division 296 imposes an additional 15 per cent personal tax on the taxable superannuation earnings attributable to balances above the $3 million threshold. A further 10 per cent applies to the component attributable to balances above $10 million. Mr Lewis said one of the important things for people to understand was that those headline rates did not mean every dollar earned within a large super balance would suddenly be taxed at the higher rate. He encouraged people to look at the effective tax rate across their overall super balance rather than simply assuming a person with more than $3 million would pay the additional 15 per cent on all earnings. With earnings on the first $3 million not taxed, Division 296 tax on income of, say, $5 million in super is effectively 6 per cent, $10 million is 10.5 per cent and $20 million is 17.75 per cent, and these rates don’t consider capital gains. Under Division 296, ‘normal’ tax principles apply, with a few tweaks, so gains are discounted by one-third on assets held for more than 12 months. So, if you have $5 million in super with earnings coming entirely from capital gains, the rate is effectively 4 per cent, $10 million is 7 per cent and $20 million is 11.83 per cent. The effective rate on earnings with a mix of income and capital gains is between the two, for example between 7 and 10.5 per cent for someone with $10 million. His broader point was that superannuation still remains an attractive retirement structure despite the new tax. “I think you’ll find super is still the best place to have your retirement savings, even if you’ve got more than $3 million in super,” he said. For the first year of the regime, whether Division 296 applies is determined using a person’s total superannuation balance at the end of the 2026–27 financial year. From later years, the legislation looks at the greater of the balance just before the start of the year and the balance at the end of the year. Mr Lewis said that made 30 June 2027 an important date for people who may be close to the threshold. “If you don’t want to be caught by Division 296 tax and can access your super, consider getting your balance down below $3 million before the 30th of June next year,” he said. However, he stressed that decisions about withdrawing or restructuring super should be considered carefully and in the context of a person’s broader financial position. Self-managed superannuation funds (SMSFs) also have the opportunity to prevent gains accumulated before Division 296 began from being caught by the new regime. SMSFs can choose to reset the cost base of qualifying CGT assets to their market value at June 30, 2026 for Division 296 purposes. The election applies to all eligible CGT assets held by the fund at that date and cannot be selectively applied to only those assets showing gains. Mr Lewis said that meant SMSF trustees should understand the consequences before making the election. “You can’t cherry pick the good from the bad,” he said. He also raised estate planning as an area requiring attention. People who die from July 1, 2027 can still be hit with Division 296 tax, with their legal personal representative footing the bill. In the financial year of death, the deceased’s balance at the start of the year is used. But until their death benefit is paid, earnings in subsequent years will be included in Division 296 tax in the year of death, which may cause significant problems and inequity, with substantial estate planning implications. Executors with limited visibility of the deceased’s super won’t know if they’re up for tax, yet may need to come up with money to pay it. Mr Lewis said if someone was going to be executor of a will for a wealthy individual, they may wish to reconsider taking on that role given they could be liable for Division 296 tax. A reversionary beneficiary’s super balance is immediately increased by the deceased’s pension balance and counted at the end of the year to determine any tax liability. To avoid this, Mr Lewis said people could consider changing a reversionary pension to a non-reversionary pension. Mr Lewis said this was another reason people with larger super balances should make sure their superannuation and estate arrangements were reviewed together rather than in isolation. His message throughout the seminar was that people potentially affected should understand the rules before making changes. He said some attendees he spoke with had not previously heard of Division 296 and could otherwise find themselves facing an unexpected tax assessment. “It’s about being prepared,” he said. This is the final article in a four-part series following FTS Financial Planning’s Federal Budget seminar in Young. The Young Witness has broken down the major changes Colin Lewis outlined into smaller, easier-to-understand sections covering capital gains tax, negative gearing, discretionary trusts and Division 296 superannuation tax. This article is general information only and is not intended as financial, tax or legal advice. Readers should seek professional advice for their individual circumstances.