A major shift in Australia’s superannuation tax landscape is looming with the Federal Government’s draft legislation introducing a new Division 296 tax on large superannuation balances. H & R Block Director of Tax Communication Mark Chapman explains what you need to know.

Designed to better target the generous tax concessions in Australia’s super system, this reform — scheduled to take effect from 1 July 2026 — will have implications for high-net-worth individuals, including some small business owners who have accumulated significant super balances over decades of saving and investing. Understanding the detail behind these proposed changes, who will be affected, and how to plan through the transition is vital for informed financial and retirement planning.

What’s Changing: A two-tiered tax on super earnings

At its core, the proposed Division 296 changes introduce an additional tax on the investment earnings associated with super balances above certain thresholds. Previously, all earnings in super were effectively taxed at the standard concessional rate — usually 15 per cent on earnings in the accumulation phase and 0 per cent in the retirement (pension) phase. Under the new draft law, individuals with larger super balances will pay extra tax on top of those existing rates.

Here’s how the new structure works under the draft legislation released in late 2025:

• $3 million threshold: Once an individual’s Total Superannuation Balance (TSB) exceeds $3 million, an additional 15 per cent tax applies to the portion of realised earnings attributable to the balance above $3 million.
• $10 million threshold: For balances above $10 million, a further 10 per cent tax applies to the earnings attributable to the portion above $10 million.

Because the new tax is added on top of the existing super tax framework, the effective tax rate on earnings becomes higher for large balances — up to 30 per cent for balances between $3 million and $10 million, and up to 40 per cent on earnings from the portion above $10 million.

Importantly, the draft legislation no longer taxes unrealised capital gains — one of the most controversial elements of earlier proposals. Instead, only realised earnings — such as interest, dividends and capital gains from assets that have actually been sold — will count for Division 296 purposes.

Another meaningful concession is that both the $3 million and $10 million thresholds will be indexed to inflation, using increments tied to the Consumer Price Index (CPI). This helps limit “bracket creep,” where static thresholds gradually capture more people as asset values rise with inflation.

Who will be affected — and who won’t

The Division 296 tax is targeted and limited in scope. According to recent commentary on the draft legislation, less than 0.5 per cent of Australians with superannuation accounts are expected to have balances high enough to trigger this tax in the first year of operation. The majority of those affected are likely to be high-income earners, seasoned professionals and self-managed super fund (SMSF) members who have aggressively accumulated assets over time.

Likely to Be Affected

• Small business owners with large SMSFs: Entrepreneurs who have used their SMSF as a vehicle to hold investment property or business assets may find their balances exceed the $3 million threshold.
• High-earning professionals: Medical specialists, senior executives and other high-income professionals with strong contribution histories are more likely to cross the threshold.
• Family wealth holders in super: Individuals who have concentrated significant family wealth in super for estate planning or long-term growth will be exposed to the regime.

Unlikely to Be Affected

• Most small business owners and employees: If your super balance is comfortably below $3 million — which is the case for the majority of Australians — you will not be subject to Division 296 tax.
• Younger savers and average earners: Because super balances generally grow over decades, younger workers and middle-income earners will almost certainly be unaffected for many years — if at all.
• Balanced couples: A couple can have up to $6 million in combined super without either individual exceeding the $3 million threshold, provided balances are split equally.

While the draft legislation still requires parliamentary approval before becoming law, the core design seems settled: a targeted super earnings tax focused on those with high accumulated wealth, not a broad tax on everyday super contributors.

What business owners should think about during the transition

With the new tax due to start from 1 July 2026 (with the first assessments likely in 2027-28), there is a clear transition period where planning and strategic review can make a difference. Here are key considerations for business owners and high-wealth earners:

1. Review Your Super Structure Now

If you are approaching — or already above — the $3 million mark, it’s wise to review your allocation of assets within super versus outside super. Strategies may include diversifying part of your wealth into non-super investment structures where different tax rules apply.

2. Understand Realised Earnings Measurement

The fact that Division 296 will apply only to realised earnings means that timing of asset sales, investment distributions and other income events could affect your tax outcome. Work with advisers to understand how “realised earnings” will be attributed by your fund.

3. Assess Cash Flow for Potential Tax Liabilities

Under the draft law, individuals may choose whether to pay the Division 296 liability personally or have the fund release money to cover it. Planning for cash flow to cover any additional tax will be crucial — particularly for SMSF trustees with large property holdings or illiquid assets.

4. Factor in Indexation of Thresholds

The indexing of thresholds means that some near the $3 million mark today may stay below it as inflation moves the goalposts. However, if your balance is growing rapidly due to strong investment returns, it’s prudent to model where you are likely to land in coming years.

5. Consult Your Adviser Early

Because the draft legislation is still being finalised and consulted on, professional advice from tax and super specialists will help you tailor your strategy to your personal circumstances.

The Division 296 changes are part of a broader effort to make super tax concessions more targeted and sustainable — with the government viewing the existing tax concessions on large balances as overly generous. For business owners with substantial super assets, the reforms signal a need to rethink long-term retirement and wealth strategies in a higher-tax environment. But for most small business owners and everyday Australians, the new tax will not be something they face in their working lives.

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