Breaking Down the New Super Tax for Balances Above $3 Million

The Government has proposed a significant change to superannuation tax rules that would impact Australians with larger super balances. From 1 July 2025, a new tax is set to apply to individuals whose total super balance (TSB) exceeds $3 million.

This measure, to be introduced under Division 296 of the Income Tax Assessment Act, has not yet been legislated but is expected to proceed. If enacted, it will fundamentally change how high super balances are taxed. Below, we outline what’s proposed, how the tax would be calculated, and what it could mean for your retirement and estate planning.

The current position

Superannuation earnings are already subject to tax:

• 15% tax generally applies to earnings inside superannuation (the accumulation phase).
  
  
• In retirement (pension phase), earnings on balances up to the transfer balance cap ($2m in 2025/26, indexed) are tax-free.
  
  

The super tax system is set up to encourage people to save for retirement, while still making sure some tax is paid, but at a lower rate than normal income tax.

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What’s Changing?

The new rules will introduce an additional 15% tax on notional earnings attributed to the portion of your balance above $3 million.

That means the first $3 million of your super will continue to be taxed under existing rules (15% or 0% in pension phase). The portion of your balance above $3 million will be taxed at an effective 30% rate on earnings.

This change is expected to affect around 80,000 Australians initially, but the threshold is not indexed, meaning over time, more individuals could be captured as balances grow.

What is Division 296?

Division 296 is the part of taxation law that sets out the rules for the new super tax. Each year, the ATO will calculate how much tax you owe based on your Total Super Balance (TSB), the combined value of all your super accounts, whether in an SMSF, industry fund, or retail fund. Instead of looking at your actual investment income or realised gains, the ATO applies a notional earnings calculation. This means they measure the difference between your opening and closing TSB for the year, adjust for any contributions or withdrawals, and treat the resulting movement as your earnings for tax purposes.

How the tax works

Let’s say on 30 June 2026, your TSB is $3.5 million.

• Your opening TSB on 1 July 2025 was $3.2 million.
  
  
• You made no contributions or withdrawals during the year.
  
  

The increase is $300,000, which is your notional earnings.

• Proportion of balance above $3m = $500,000 / $3.5m = ~14.3%
  
  
• Taxable earnings under Division 296 = $300,000 × 14.3% = $42,900
  
  
• Additional tax payable = 15% × $42,900 = $6,435

This tax is in addition to the usual tax already applying to earnings inside your super funds.

It’s important to note that this isn’t a flat 15% tax on the portion of your balance above $3 million. Instead, the ATO works out what share of your earnings relates to the excess and applies the tax only to that part.

Implications for super members

1. Unrealised gains will Be taxed

Realised gains are profits you make when you sell an investment, while unrealised gains are paper increases in value, like when a property or shares go up in price but you haven’t sold it yet.

Unlike the current system, this new tax applies to notional increases in your balance, including unrealised gains. Even if your super fund’s investments rise in value but you don’t sell them (and don’t receive income), the ATO may still assess tax.

2. All super funds are aggregated

Your TSB is measured across all your super accounts, including SMSFs, industry funds, and retail funds. It doesn’t matter where your money is, it’s all counted towards the $3 million threshold.

3. No indexation of the $3m cap

Unlike the transfer balance cap, the $3 million threshold is not indexed to inflation. This means that as investment growth continues, more Australians may fall into this regime over time.

4. Estate planning considerations

Super is often part of broader wealth transfer strategies. The new tax could affect:

• The timing of withdrawals before death (to reduce future tax for beneficiaries).
  
  
• Whether funds should be left inside or taken out of super.
  
  
• SMSF strategies that were previously tax-efficient.
  
  

5. Impact on SMSF Strategy

Self-managed superannuation funds (SMSFs) will need to carefully consider how asset valuations are reported, given that annual market movements directly impact the notional earnings calculation. This may also affect investment strategies for growth assets vs. defensive assets. For SMSFs that hold business property, the new rules could create additional complexity, as property values can fluctuate significantly from year to year. A large uplift in value (even without selling the property) could increase notional earnings and therefore trigger a higher Division 296 tax bill. Trustees may need to plan for liquidity to meet potential tax liabilities, as property-rich funds often have limited cash flow. This makes it especially important to review asset allocation, valuation policies, and exit strategies in light of the new regime.

Our view

The new super tax is a significant policy shift. While it only applies to a small group of Australians now, its lack of indexation means more people will be affected over time.

For those with balances approaching $3 million, now is the time to start planning. The rules are complex, and the ATO’s notional approach to calculating earnings can result in outcomes that don’t match actual cash flow.

Proactive advice can help ensure your retirement strategy, SMSF management, and estate plans remain tax-effective under Division 296.

The new Division 296 tax introduces a layer of complexity for Australians with super balances above $3 million. Because the rules apply to all super funds combined, and because they tax notional earnings rather than actual cash flow, it’s important to understand how your reporting and compliance obligations may change.

If you think this new tax may apply to you, now is the time to review your situation. Please reach out if you’d like us to work with you and your financial adviser to prepare for the changes ahead.

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