$3 million super tax explained

What’s actually changing and who it affects

Known to some as the ‘$3 million super tax’, new legislation
effective from 1 July 2026 will add an extra 15% tax on earnings attributable
to the part of a member’s Total Super Balance (TSB) above
$3 million, plus a further 10% (totalling 25% extra) on the portion
attributable to their Total Super Balance (TSB) over $10 million.

This tax doesn’t replace the 15% tax already applied inside
super – it sits on top and is assessed to the individual but those affected
will have the choice to pay the tax personally or elect for it to be released
and paid out of their super.

Most Australians are unaffected, although a relatively small
number of higher balance members may be taxed under the legislation.

When does it start and where does the legislation stand
today?

The new legislation was passed into law in March 2026 and
takes effect from 1 July 2026.

The first assessments under the new rules will occur in the
2027–28 financial year.

Accompanying regulations were also registered in late June
and provide further detail on the application of the rules to ensure that all
superannuation interests are properly assessed for the purposes of the tax.

Notably, the regulations clarify the following:

• How Division 296 earnings are allocated between members.
• How earnings are calculated for defined benefit pensions.
• Which amounts are excluded from Division 296 (for example, certain judicial pensions, foreign super interests and other specified interests).

What the $3 million super tax (Div 296) does

The key change: extra tax above the thresholds

An extra 15% tax applies to the proportion of earnings
attributable to the part of a member’s TSB above $3 million and an extra 25%
tax to the proportion of earnings over $10 million. It effectively brings the
tax on super earnings above these amounts to 30% and 40% respectively¹.

For example, if your TSB is $4 million and you had total
superannuation earnings of $200,000, only 25% or $50,000 of your earnings for
the year would be subject to the additional 15% Division 296 tax, not the whole
$200,000.

How earnings are calculated: based on realised gains

The tax will be calculated on realised earnings including
realised capital gain – that is, the fund’s actual taxable income, adjusted for
taxable contributions and any exempt income from the fund’s pension assets. This
approach aligns with existing income tax concepts and avoids taxing unrealised
gains.

What the Total Super Balance (TSB) measure includes

TSB includes accumulation balances, retirement phase
balances such as the value of account based pensions and defined benefit
pensions (including the value of any death benefit income stream they are
receiving), rollovers in transit and certain outstanding Limited Recourse
Borrowing Arrangement amounts which are only relevant for self managed super funds.
It is measured at 30 June each year.

Whether and how much you may be affected by the new rules
will depend on a number of things but the key determining factor is your TSB at
the beginning and at the end of a financial year, whichever is higher. A
transitional rule in place for 2026-27 means that only your TSB at the end of
2027 will count, which gives you time to decide the best course of action if
your TSB is approaching $3 million.

The 33% Capital Gains Tax discount in super still applies

Even if your TSB exceeds the $3 million threshold, the
effective tax rate on earnings attributable to the portion of your TSB that
exceeds $3 million (but is less than $10 million) may only be up to a maximum
of between 20% and 30%.

This would depend on how much of your earnings are made up
of capital gains and would also take into account the 33% CGT discount on
assets held for more than a year within super.

This may be less than your marginal tax rate or what you
could end up paying if you were to move your money outside super.

Who will be affected

Under $3 million

No Div 296 effect at all. The standard 15% accumulation tax
and 0% pension phase tax (within the Transfer Balance Cap) continue to apply.

Around the threshold

If your total super balance is trending toward $3 million
through returns alone, Division 296 tax may apply in a future year.

Well above the threshold

For balances between $3 million and $10 million a maximum
tax rate of between 20% and 30% may still compare very favourably with
investing outside super and paying tax at marginal rates of up to 45%. For
balances over $10 million you should seek specialist tax advice.

How the tax would be calculated – a worked example

² To determine the taxable percentage of your earnings attributable to
balances over $3 million, the higher of your TSB at the beginning or end of the
financial year will be used. However, for the first year after this measure
starts, a transitional rule will apply in 2026-27 so that only your TSB at the
end of the year will count.

Unrealised gains: are they taxed?

No. The government has moved away from an earlier plan to
calculate the tax based on changes in a member’s total super balance over a
year.

The new tax will be calculated on realised earnings or the
fund’s actual taxable income, adjusted for taxable contributions and any exempt
income from the fund’s pension assets. Realised earnings will not include
unrealised capital gains.

What the change would mean for estate planning and
insurance

A meaningful change to the tax profile on the margin above
$3 million may affect decisions around binding death benefit nominations, how
much life insurance to hold through super and whether some assets belong
outside super.

Don’t change anything until you understand how you may be
affected. Consider discussing these decisions with a financial adviser. 

¹ Super is generally taxed at 15%. Higher income earners may
incur an additional 15% tax, known as Division 293, on their contributions if
their combined income and concessional super contributions (including employer
Superannuation Guarantee contributions) exceed $250,000 in a financial year.
The $3 million super tax, or Division 296, is separate, and applies to members
with high balance super accumulation or super pension accounts, comprising an
extra 15% tax on the proportion of earnings attributable to the part of a
member’s TSB above $3 million. An additional 10% applies to the portion of a
member’s TSB over $10 million.

² Whether and how much you may be affected by the
new rules will depend on a number of things. This will generally include your
TSB at the beginning and at the end of a financial year, whichever is higher. A
transitional rule in place for 2026-27 means that only your TSB at the end of
the year will count.

³ Other factors, such as the 33% CGT discount on
long held earnings in super, may apply to reduce tax payable under the Division
296 legislation.

Source: Colonial First State