Key Highlights

• No. Total Superannuation balance aggregates an individual’s interests across the super system.

• In-scope SMSFs must report relevant Division 296 Earnings information through the annual return.

• No. Division 296 is assessed separately for each individual member.

• Members and trustees must plan how an assessment will be paid without disrupting the fund’s Investment and cash-flow needs.

Division 296 is enacted law, applying from the 2026-27 income year, and it has generated a steady stream of questions from members of self-managed super funds (SMSFs). Introduced into the Income Tax Assessment Act 1997 by the Treasury Laws Amendment (Building a Stronger and Fairer Super System) Act 2026, it adds tax on part of the superannuation earnings of individuals with large balances. Rather than restate the theory, this article works through the factual questions trustees most often raise, from how the threshold is measured to how the bill is settled. It is general information only. Nothing here is personal tax advice, and members with significant balances should seek guidance tailored to their circumstances.

How does the $3 million threshold actually work?

The threshold is based on an individual's total superannuation balance (TSB), which aggregates all of a person's superannuation interests, not the balance of one fund. The large super balance threshold (LSBT) is $3 million. Where TSB exceeds $3 million, an additional 15 per cent tax applies to the proportion of the individual's taxable superannuation earnings attributable to the balance above $3 million. A second threshold, the very large super balance threshold (VLSBT) of $10 million, adds a further 10 per cent to earnings attributable to the balance above that level. Both thresholds are indexed and may rise in future years.

Is the whole balance taxed, or just part of it?

Only part. The additional tax does not apply to the entire balance or to all earnings. It applies to the proportion of taxable superannuation earnings attributable to the amount above the relevant threshold. Earnings attributable to the first $3 million are not caught by Division 296, and the ordinary tax already paid within the fund continues to apply as usual. Division 296 is an additional layer on top.

What counts as "earnings" — does it include unrealised gains?

This is the question that causes the most confusion. Under the enacted law, taxable superannuation earnings are calculated from an adjusted amount of the fund's actual, realised taxable income. The regime is not based on unrealised gains. Earlier public debate about taxing paper increases in asset values reflected an earlier proposal, not the law that now applies. Members should be careful to rely on current descriptions of the realised-earnings methodology.

Who is affected?

Division 296 applies to individuals whose TSB exceeds the threshold, whether they are in an APRA-regulated fund or an SMSF. It is not limited to SMSF members, though SMSFs frequently hold the larger balances the measure targets. Because assessment is at the individual level, each member is tested against their own TSB. In a two-member SMSF, for example, each member's position is assessed separately.

How is the tax assessed and who receives the bill?

Division 296 is assessed to the individual, not the fund. SMSFs report each in-scope member's relevant superannuation earnings through the SMSF annual return from 2026-27 onwards. The ATO then issues a Division 296 assessment to the individual member. This is a key point for trustees: the Liability is personal, even though it relates to money held inside super.

How is the tax paid?

The member can pay the assessed amount personally or elect to have it released from their superannuation, similar in concept to the release arrangements used for other super-related liabilities. This flexibility matters where a member does not want to draw on personal cash flow, but it also means trustees need to think about whether the fund holds sufficient accessible Assets if a release is elected.

Hypothetical example

Suppose "David" has a total superannuation balance of $3.6 million, largely in one SMSF. For the year, his taxable superannuation earnings are determined under the Division 296 method. The additional 15 per cent applies only to the share of those earnings attributable to the $600,000 above the $3 million threshold, not to his whole balance or all his earnings. He receives a personal assessment and chooses whether to pay it himself or release the amount from the fund. This example is simplified, illustrative, and not advice.

Does indexation change who is caught over time?

Yes, potentially. Both the $3 million and $10 million thresholds are indexed, so they may increase in future years. A balance near the threshold today may sit differently relative to an indexed threshold later. Indexation is a feature of the enacted regime, though the timing and size of any increases depend on the indexation mechanism applied.

Common mistakes to avoid

Three errors recur. First, believing the tax applies to unrealised gains; under the enacted law it is based on realised earnings. Second, assuming the entire balance is taxed at the higher rate; only the earnings attributable to the excess are. Third, overlooking the personal nature of the assessment and the need for the fund to have accessible assets if a release is elected. Members should not make abrupt changes based on generic commentary; strategy questions belong with a qualified adviser.

What trustees should watch next

Practical follow-through will come through ATO guidance on Division 296 reporting in the SMSF annual return, the assessment and release process, and any updates on threshold indexation. Trustees with large-balance members should ensure their fund's records and valuations support accurate reporting for 2026-27.

The bottom line

For SMSF members above $3 million, the questions that cannot be ignored are factual and answerable: the threshold is measured on TSB, only earnings above the threshold are hit with the additional tax, the calculation uses realised earnings, and the assessment is personal. Getting the facts straight is the first step; individual advice is the next.