Highlights

• Division 296 proposes an additional 15% tax on earnings attributable to the portion of a super balance above AUD 3 million.
• The measure could reduce long-term compounding for affected investors by lowering the amount of earnings retained each year.
• The impact depends on factors including balance size, investment returns, time horizon, and the final legislated design.
• Key uncertainties remain around the treatment of unrealised gains, threshold indexation, and implementation details.

When a new layer of tax is proposed for large superannuation balances, a natural question follows: how much could it actually affect the wealth a person builds over time? Division 296, the proposed measure that would add 15% to the earnings attributable to balances above $3 million, raises exactly this question. This article takes a conceptual look at how an additional, recurring drag on returns can interact with compounding over a long horizon. It is written as a general illustration of mechanics, not as modelling of any individual's position and not as advice.

The aim is to help readers reason clearly about the issue. Understanding how small annual differences can accumulate over decades is useful, but so is keeping that understanding in proportion: the measure as proposed touches only a portion of earnings on the part of a balance above a high threshold, and its final form depends on legislation still being settled.

Direct answer: the quick summary

Division 296 could, in principle, reduce the long-run growth of a very large super balance, because any additional tax on earnings leaves less to compound each year. The effect applies only to the proportion of earnings attributable to the part of a balance above $3 million, so it is partial rather than across the board. Whether and how much any individual is affected depends on their balance, returns and circumstances, and on the final legislated design, which means general illustrations should not be read as predictions.

Why this matters now

Compounding is the engine of long-term superannuation growth. Returns earned in one year become part of the base that earns returns the next, and over decades that effect is powerful. The same logic works in reverse for costs: anything that reduces the return retained each year, whether fees, drawdowns or tax, reduces the base available to compound in future years.

This is why a recurring tax on earnings is conceptually different from a one-off charge. A single deduction reduces a balance once; a recurring charge reduces the amount reinvested year after year. Over a long horizon, even modest annual differences can become visible. Recognising this helps investors think sensibly about the measure without overstating it, because the size of any effect depends heavily on how much of a balance sits above the threshold and for how long.

It also helps to keep two separate ideas distinct. The first is the headline rate, which can sound large in isolation. The second is the base to which that rate applies, which under this measure is only the proportion of earnings linked to the part of a balance above the threshold. A high rate on a narrow base produces a very different result from the same rate applied broadly. Holding both ideas in mind is the key to a balanced view, and it is why careful reasoning matters more here than reacting to a single number.

Who may be affected

Division 296 is assessed at the individual level, looking at a person's total superannuation balance across all funds at the end of the financial year. Only where that combined balance exceeds $3 million does the additional tax come into play, and even then only on a proportion of earnings.

On the figures cited when the policy was introduced, the affected group is small, in the order of half a per cent of account holders, though that still amounts to tens of thousands of people. A widely noted point is that the threshold was not indexed in the original design. Over a long horizon, that raises the possibility that balances which are comfortably below $3 million today could approach it through ordinary growth, which is precisely the kind of long-run dynamic a compounding-focused discussion should keep in view.

What investors should understand

The proportional design is central to understanding the likely impact. The share of earnings exposed to the extra tax equals the amount by which a balance exceeds $3 million divided by the total balance. A person only slightly above the threshold has a small proportion exposed; a person with a much larger balance has a larger proportion exposed. The additional 15% then applies to that proportion of earnings, on top of existing super taxation.

Consider the idea in general terms. Imagine two otherwise identical paths for a large balance, one with and one without an extra slice of tax on the relevant portion of earnings each year. In the early years the two paths look similar. As time passes, the path carrying the extra tax retains a little less each year to reinvest, and the gap between the two slowly widens because of compounding. The size of that gap depends on the rate of return, how far the balance sits above the threshold, and the number of years involved. This is an illustration of mechanics only; it is not a forecast, and real outcomes vary with markets, contributions, withdrawals and the final design of the measure.

A further consideration from the original proposal is how earnings were to be measured. Rather than only realised income, the original design looked at the year-on-year movement in the total balance, adjusted for contributions and withdrawals, which could bring unrealised gains into the calculation. For a long-term investor, this raises the prospect of tax being assessed in a year when asset values rose on paper, even without a sale. This was a debated feature of the original proposal, not settled law, and its final treatment matters for any conceptual picture of long-run effects.

Time horizon deserves emphasis in its own right. A difference that looks trivial in a single year can become more noticeable across a working lifetime and into retirement, because each year's retained return forms part of the base for the next. The reverse is also true: a person who is only briefly above the threshold, or only marginally over it, would see a much smaller cumulative effect than someone substantially and persistently above it. This is why generalisations about long-run wealth are difficult, and why any meaningful figure has to be grounded in a specific set of assumptions about balance, returns and duration rather than asserted in the abstract.

SMSF and managed super fund considerations

Because the measure is individual-level, the conceptual impact on compounding does not depend on whether savings sit in a self-managed superannuation fund (SMSF) or a large APRA-regulated fund. What can differ is how earnings are measured in practice and how liquidity is managed.

Funds holding assets that are not easily sold, such as property or unlisted investments, may face questions about meeting any liability without disturbing a long-term strategy, particularly under an approach that references balance movements. A member who wishes to keep assets invested for compounding, yet needs to fund a liability, has a practical tension to work through. These are matters to consider with qualified professionals, since the right approach depends on the fund's assets and the member's goals.

Possible planning options

Commentators discuss several areas that individuals sometimes review with a licensed adviser when thinking about long-run outcomes. These are options to consider, not recommendations.

• Reviewing the level of voluntary contributions into a balance that is already large, weighing future growth against the proportion that might be exposed.
• Considering, where eligible, whether partial withdrawals or recontribution arrangements fit broader retirement objectives.
• Examining whether holding some assets in structures outside super, such as trusts or investment (insurance) bonds, suits particular goals.
• Keeping any review anchored to overall retirement and estate planning rather than to a single tax consideration.

What suits one person may be unsuitable for another, so the appropriate step is a discussion with a licensed adviser who can model an individual's actual position.

Risks and uncertainties

Any conceptual picture of long-run impact rests on assumptions that may not hold. Returns are uncertain, contribution and withdrawal patterns vary, and the measure's final design is not settled. Illustrations of compounding can be helpful for intuition but should never be mistaken for predictions of a particular result.

The treatment of unrealised gains, the absence of indexation in the original design, and the precise earnings calculation could each change before the policy is finalised. Each would alter the shape of any long-run estimate, which is why over-precise projections about an individual's future wealth are best avoided until the rules are confirmed.

What to watch before 1 July 2026

• Whether the measure is legislated, amended or deferred, and confirmation of the commonly cited 1 July 2026 start.
• The final method for measuring earnings, including whether unrealised gains are captured.
• Any decision on indexing the $3 million threshold, which has long-run significance.
• Guidance on how liabilities are calculated, notified and paid.