After years of debate, Division 296 tax on large super balances is now law and has applied since 1 July 2026. For SMSF trustees, the first income year is already under way, which means the balances, valuations and records kept during 2026–27 will shape the first assessments. The final version differs sharply from the original 2023 proposal, so understanding what actually passed may matter more than earlier headlines.

What has become law

The tax was legislated through the Treasury Laws Amendment (Building a Stronger and Fairer Super System) Act 2026 and a companion imposition Act. According to the ATO, it commenced on 1 July 2026, so 2026–27 is the first income year it applies to.

The law creates two thresholds based on an individual's total super balance, or TSB. The large super balance threshold is $3 million and the very large super balance threshold is $10 million for 2026–27. The ATO notes both thresholds may increase through indexation in future years.

Where a member's TSB exceeds $3 million, an additional 15 per cent tax applies to the share of their super Earnings attributable to the balance above that level. A further 10 per cent applies to the share attributable to any balance above $10 million.

In practice, super funds already pay tax of up to 15 per cent on Investment earnings. Combined with Division 296, earnings linked to the portion of a balance between $3 million and $10 million could face an effective rate of around 30 per cent.

Earnings linked to the portion above $10 million could face an effective rate of around 40 per cent. These are headline figures only; actual outcomes will depend on each individual member's own circumstances.

Realised earnings, not paper gains

The most significant change from the original proposal is the treatment of unrealised gains. The 2023 version would have taxed movements in balances, including increases in asset values that had not been sold. The version passed by Parliament does not do this.

Instead, the tax is based on realised earnings. The ATO describes SMSF earnings as an adjusted amount of fund taxable income., that broadly captures investment income such as rent, interest and dividends, along with net realised capital gains, while concessional contributions are ignored.

For SMSFs, the fund's earnings are then attributed to members. The ATO says an actuary generally needs to be engaged to work out the amounts attributable to in-scope members, with limited exceptions.

Who is assessed and how it is paid

Division 296 tax is assessed to the individual, not the fund. The ATO says the tax can generally be paid from the individual's super fund or funds, which may assist members whose Wealth is concentrated in super., a member can pay personally or elect to have the amount released from super, and this release option is available even to members who could not otherwise access their benefits.

Available analysis notes that some exemptions, including certain children receiving pensions from a deceased parent's super and people who received structured settlement payments into super.

Why it matters for SMSF trustees

The ATO says SMSF trustees must report in-scope members' relevant super earnings in the fund's annual return from 2026–27 onwards. That adds work to the annual compliance cycle, particularly for funds holding Assets needing regular valuations.

Timing rules also matter. For 2026–27 only, the ATO says the tax applies if a member's TSB at the end of the year exceeds the thresholds. From later years, it applies if the TSB either just before the start of the year or at the end of the year exceeds them. The ATO also notes that limited recourse borrowing arrangement amounts are disregarded when calculating TSB for these purposes.

Relatively few funds are directly affected overall. According to the Class 2026 Annual Benchmark Report, reported by SMS Magazine, 8.8 per cent of SMSFs on its platform had a member with a TSB above $3 million, while a further 9.4 per cent had a member between $2 million and $3 million.

For context, the ATO's March 2026 quarterly statistics show 672,805 SMSFs holding total estimated assets of $1.06 trillion.

The cost base election

One decision is specific to SMSFs and small funds. Trustees can elect to reset the cost base of the fund's CGT assets to their Market Value at 30 June 2026 for Division 296 purposes.

According to the ATO, the election must be made by the due date of the fund's 2026–27 annual return, cannot be revoked and does not need to be provided to the ATO. Records must be kept. SMS Magazine reports the election must apply to all CGT assets held at that date, so it is an all-or-nothing choice.

Class data suggests the decision may be relevant for many funds. It found 72.8 per cent of SMSFs had positive net unrealised capital gains positions at 30 June 2026. Class chief executive Tim Steele said there were "potentially one-fifth of funds on Class" that may need to make an election.

What trustees may want to consider

Depending on individual circumstances, trustees may be asking whether any member's TSB could exceed $3 million at 30 June 2027, whether reliable valuations exist for all assets at 30 June 2026, and how actuarial and reporting obligations will be met.

Industry commentators have also cautioned against decisions driven only by tax. Speaking to SMS Magazine, RSM Australia partner Kate Timms warned that tax considerations can lead to choices that may not suit people "20 years down the track".

The bottom line

Division 296 is now enacted law and applies from 1 July 2026. It adds 15 per cent tax on earnings attributable to balances above $3 million and a further 10 per cent above $10 million, based on realised earnings rather than unrealised gains. The tax is assessed to individuals, but SMSF trustees carry new reporting, valuation and actuarial responsibilities. The one-off cost base election adds a further, irrevocable decision point.