Clients often ask: Can I just ignore the new super tax if I don’t have $3 million in super? The right answer is the classic consultant’s response – it depends.
There are a few circumstances under which all of us, even if we don’t have $3 million in super, should care about the Division 296 tax.
While the new version of the tax includes provisions to index (increase) the $3 million threshold in line with inflation, super often goes up more quickly than inflation. Even if no new contributions are being added, we’d all hope that over the long term our investments beat inflation. So someone sitting slightly below the threshold today might well cross it in future.
And often the most tax effective way to do this is to leave it in super and convert it to a pension. That means two members of a couple who both have $2 million at the moment would likely go over the threshold if one of them dies. The survivor would continue to have their own $2 million, but they’d also start receiving a pension from their spouse’s $2 million super balance – a total of $4 million.
In fact, they would be subject to Division 296 tax even if they only received their inheritance on June 29. There are some special carve-outs while we transition to the new tax in 2026-27 but ignore these for the moment and look to the future.
Imagine this couple had their $4 million (combined in a self-managed super fund). Both of them are receiving pensions that automatically revert to the other on death.
One of them dies on June 29, 2028, and the balance immediately transfers (reverts) to the survivor. The survivor then has $4 million in super on June 30, 2028.
The proportion of their super over $3 million is 25 per cent. Consequently, they would be subject to Division 296 tax on 25 per cent of their super earnings during 2027-28.
So far, the material published by Treasury suggests there will be no adjustment to their share of the fund’s earnings to reflect the fact that, for almost all of the year, they had less than $3 million in super.
Let’s imagine, for example, the fund’s earnings overall (dividends, franking credits, rent, interest, realised capital gains) amounted to $200,000 (this is about 5 per cent of $4 million).
It is likely the survivor’s “share” would be $100,000 (half this amount because the fund was divided equally between the two members for almost all of the year). Division 296 tax would be paid at 15 per cent times 25 per cent (the proportion over $3 million) times $100,000 – that is, $3750. If the deceased had died just a couple of days later, no Division 296 tax would have been paid for 2027-28.
SMSFs have a unique opportunity to “opt in” to some special rules for the way in which Division 296 tax is calculated on income that comes from capital gains. Specifically, they can choose to have these capital gains worked out using the market value of the fund’s assets at 30 June 2026 rather than their original purchase price.
In other words, if an SMSF asset was bought years ago for $1 million, is worth $2 million on June 30, 2026, and is eventually sold for $2.5 million, a fund that “opts in” will be able to work out capital gains for Division 296 tax based on $500,000 ($2.5 million less $2 million) rather than $1.5 million ($2.5 million less $1 million).
This doesn’t mean the fund pays any less capital gains tax – nothing changes there. But it does mean the member’s earnings for Division 296 tax will be lower.
The interesting thing about this special concession is that any SMSF can opt in – even if none of its members have more than $3 million in super right now. The idea is that you might go over $3 million in the future (or you might even have other super that means you’re actually already over $3 million, just not in your SMSF) – so your SMSF should be able to take up this relief.
That gives every SMSF trustee a choice to make at June 30, 2026: opt in or not?
Opting in means opting in for all assets – even those that are in a loss position at 30 June 2026. So it won’t be right for everyone. But for those whose SMSF assets are predominantly worth more than their original purchase price at 30 June 2026, it would seem a no-brainer.
So perhaps everyone with an SMSF cares about understanding Division 296 tax – even if just a little.
For the latest information, news and resources on the Division 296 tax, visit our landing page here.