Changes Announced to Proposed Division 296 (Superannuation Fund Earnings Tax)

Tax Law: 20 October 2025

Author: Marco Saccotelli - Our People

The Federal Treasurer, Dr. Jim Chalmers, has announced design changes to the proposed Division 296 of the Income Tax Assessment Act 1997 which was contained in an introduced but unenacted Bill (Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023).

The Original Legislative Proposal

Essentially, the original concept was to impose an additional 15% earnings tax on a proportion of earnings upon total superannuation balances over $3m, with the tax to be paid by the individual member and not their superannuation fund but with the ability for a member benefit release to be made so that the Fund can pay on behalf of the member.  Crucially, it was proposed that the additional tax on the earnings of the fund would also include unrealised capital gains on the super fund’s investments held in the member’s total superannuation balance. The total member balance might include a pension account and a remaining accumulation account (given that only $2m can now be treated as a transfer balance into an account-based pension which has no earnings tax upon it and is generally tax-free to members who are over 60 years of age). 

Many industry bodies including the Taxation Institute, financial planning and super fund associations made submissions which pointed out the fact that no indexation of the $3m account balance was proposed as well as the unfairness of taxing unrealised gains in a members total superannuation balance, especially without any adjustment mechanism for actual realised gains which are lower than the point in time market value when tax was assessed or even potential capital losses. Liquidity issues for SMSFs holding farming or other  business real property was also raised as a key problem.

It is important to note that the additional tax on earnings is not a flat tax upon the total superannuation account earnings.  It is in effect an additional 15% earnings tax (over the current law which provides for 15% tax on income derived on assets held in an accumulation account) on a proportion (a percentage) of the member’s balance which exceeds $3m with adjustments for withdrawals and contributions from opening to closing of the financial year.  

The Announced Changes

The changes announced have removed taxation on unrealised gains (a movement in asset value without an actual disposal) and proposed that:

• Fund earnings on the proportion of earnings on balances between $3m and $10m will incur the additional 15% tax; and
• Fund earnings on the proportion of earnings on balances over $10m will incur a further additional 10% (so 25% additional tax); and
• The $3m and $10m total superannuation balance thresholds will be indexed to inflation but only when certain indexation amounts are attained: i.e. $150,000 for the $3m threshold and $500,000 for the $10m threshold.

The proposed start date has been pushed to 1 July 2026 meaning that the first assessments will be calculated one year after that commencement time. Under both the original and revised rules, tax-free earnings on pension assets are included in total earnings for the purposes of the calculation of the proportion of earnings that may be subject to the second and third tiers of taxation (above $3m but below $10m and above $10m).

Our View

These are welcome changes but not for persons who currently have total superannuation balances over $3m and especially not for those members with balances over $10m.  In terms of simplicity, superannuation is already one of the most complex areas of taxation law and these changes will just add another layer of complexity.

It is true that some high net wealth individuals have been using superannuation as an estate planning vehicle to tax effectively accumulate wealth for the next generation rather than for funding their retirement, but legitimately and in accordance with the law.  It is also true that it is tempting for the Federal Government to raid superannuation when it requires more revenue and dress the exercise up on equity grounds.  

The Government may not receive the tax take that Treasury has estimated, as high net wealth members may withdraw lump sums (tax free when over 60) and look to other avenues for tax effective investments outside of an account-based pension environment. For example, tax effective wealth accumulation with the ability to nominate beneficiaries on death, make withdrawals and be taxed at a flat 30% rate with the benefit of imputation credits can be found in a range of investment instruments such as investment bonds.

At any rate, we consider that constant tinkering with superannuation policy should be avoided so as to maintain confidence in the system and to reduce compliance costs and uncertainty.  These are certainly welcome changes however, particularly the removal of tax on paper gains.