What you need to know about the new tax on higher superannuation balances

There's been plenty of noise to draw your attention to the fact that changes are coming to superannuation. It's been a while coming.

Back in 2023, a bill quietly hit government proposing changes to how higher superannuation balances are taxed. Known as the Division 296 changes, which are part of the Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023, the aim was to improve equity in the superannuation system, but the bill has continued to create controversy. It passed the House of Representatives and while it originally was blocked in the Senate, it is anticipated to be reintroduced and passed with the expected effective date of 1 July 2025.

There are several well-known experts who have raised concerns, including Wilson Asset Management’s Geoff Wilson AO, who recently discussed this in an interview with Livewire’s Tom Richardson – you can read more here.

Readers might be excused for being confused by the bill, both in terms of what makes it controversial and, secondly, in terms of whether it actually means anything for them. After all, only a small percentage of Australians have a total superannuation balance above $3 million. Consider this your 101 guide to the bill.

Tax and super

While your marginal tax rate will vary based on your income, the tax on the earnings in your superannuation are currently set at up to 15%. Earnings in a pension account when you are retired are tax-free.

Earnings are calculated as interest and dividends, less any tax deductions or credits.

Tax treatment of capital gains on assets sold varies depending on how long you’ve held them. For those held over a year, the gain is taxed at 10%. For those assets sold that were held for less than a year, the gain is taxed at 15%.

This tax treatment is used instead of your marginal tax rate. Your marginal tax rate applies to earnings on your investments outside of superannuation.

What are the Division 296 changes?

The bill proposes tax changes for individuals with a total superannuation balance above $3 million.

From 1 July, it proposes concessional tax rates are “up to an overall 30% on a percentage of earnings equal to the superannuation balances above $3 million.”

There’s a lot of confusion in the market over what this means and to be clear, it doesn’t mean all the earnings are taxed at 30%, it treats the earnings in a proportional way.

As a very basic explanation, if 10% of your total superannuation balance was above $3 million, then the 30% tax would apply to 10% of your earnings for the tax year, while the 15% concessional rate would still apply to the rest.

From my perspective, I find it easiest to think of it this way.

All the earnings on your superannuation in the accumulation phase are subject to a 15% tax. If your balance is over $3 million, then a proportion of your earnings will be subject to an additional 15% tax under Division 296.

Here's a (very) basic worked example of how Division 296 might look in action for a portfolio in accumulation phase (aka growth):

In this simple example, the individual would pay an additional $1,500 for the earnings attributed to the balance above $3 million.

So far, so good?

Here’s where it gets tricky (and why so many industry experts like Wilson or the Association of Superannuation Funds Australia (ASFA) are concerned) …

The question of how earnings are calculated

While earnings for superannuation balances are typically based on interest and dividends, less any tax deductions or credits, earnings in Division 296 are calculated differently.

It considers the total superannuation balance at the start of the new financial year compared to the previous year and factors withdrawals and net contributions as an estimation of earnings.

You can see the formula used for calculating earnings and the proportion of those earnings that can be attributed to the balance above $3 million below.

The Treasury has an example of the earnings calculation, which I've copied out below:

“Carlos is 69 and retired. His SMSF has a superannuation balance of $9 million on 30 June 2025, which grows to $10 million on 30 June 2026. He draws down $150,000 during the year and makes no additional contributions to the fund.

• This means Carlos’ calculated earnings are: $10 million - $9 million + $150,000= $1.15 million
• His proportion of earnings corresponding to the funds above $3 million is ($10 million - $3 million) ÷ $10 million = 70%
• Therefore his Division 296 tax liability for 2025-26 is: 15% x $1.15 million x 70% = $120,750

Experts are concerned that this method of calculating earnings is too simplistic.

While it would capture interest and dividends, it could also capture unrealised capital gains (that is, the increased value in any assets you continue to hold in your portfolio, like shares that have risen in price or property). 

This means you would be paying tax on unrealised capital gains, and this is unprecedented in the Australian tax regime. It leaves tax open to movements in capital markets, and there are concerns about the implications for such a taxation to be extended more broadly over time.

It might also raise questions on how to pay the tax as you haven’t actually realised financial gains on an asset, i.e. you don’t have extra money in your hand. Consider a farming property held in a SMSF where the land value has substantially increased. A farmer may need to sell other assets to cover the tax bill for the unrealised capital gains on the farmland.

You can see other examples in this factsheet prepared by the Association of Superannuation Funds Australia.

The challenges of indexation

While taxing unrealised capital gains has generated the bulk of attention and concern, it’s also worth highlighting that there are no provisions in the bill to index the $3 million cap to inflation.

That cap may seem unattainable for most of us by 2025 standards, but bear in mind how much our views on money change based on inflation over time.

For example, today’s wages may have been unfathomable by the standards of 50 years ago. The average total weekly full-time wage is $2,043.00 based on ABS data, November 2024, while the average weekly full-time wage 50 years earlier in 1974 was $108.10.

If you extrapolate forward, that $3 million cap may seem vastly different in 50 years’ time when today’s youngest workers are hitting retirement age.

What next?

If you are concerned about the changes, you may wish to contact your local member. Wilson Asset Management are also running a petition which you can find on their website.