Treasury released its draft legislation on 19 December 2025 for the new Div 296 and at the time of writing this article the draft legislation was open for consultation (closing 16 January 2026).
The following is a summary of the draft legislation, noting that it is subject to change post the consultation. That said, I don’t expect many changes.
This article will concentrate on how the measure will affect SMSFs and their members. It will not deal with APRA regulated superannuation funds nor defined benefit pensions.
Main changes
The main changes to this version of the legislation vs the prior draft legislation include:
Div 296 now applies to taxable fund earnings including realised gains (and not to unrealised gains)
In addition to the previously proposed 15% tax on earnings on account balances above $3 million, there is an additional 10% on earnings on account balances above $10 million
Both the $3 million and $10 million thresholds will be indexed
The new measure is long and complicated
The new measure is complicated and will add about 22 pages of legislation to the Income Tax Assessment Act 1997, plus over 30 pages to other acts. Plus, there will be regulations that we don’t have yet.
The measure also contains many new definitions which must be drilled down in detail, as seen below.
How the new measure works
A member of a superannuation fund will be liable for Div 296 tax if they have “taxable superannuation earnings” for a financial year (starting in the 2026/27 financial year).
In addition, to determine your “taxable superannuation earnings” you need to work through the following concepts:
Your “total superannuation earnings”
Your SMSF’s “Division 296 earnings”
Your “relevant superannuation earnings”
So, let’s take a couple of deep breaths and jump into it.
Exclusions from the regime
Exclusions from the regime include:
Interests in child pensions (ie sourced from death benefits)
Interests related to structured settlement contributions
Interests in constitutionally protected funds and judicial pensions
Earnings from foreign super funds and non-complying super funds
What are “taxable superannuation earnings”?
Div 296 tax is measured against your “taxable superannuation earnings”. This is the 15% tax on benefits above $3 million. This is measured via 2 steps.
First step
In order to determine if you have “taxable superannuation earnings” you must first determine if:
Your “total superannuation balance” is greater than $3 million at the start of the financial year or at the end of the financial year – the greater of these amounts is called the “total superannuation balance reference amount”
Your “total superannuation earnings” for the financial year are greater than nil.
A key change here is that you will trigger Div 296 if you have more than $3 million of benefits at the start of the year even if you don’t have $3 million by the end of the year.
Therefore, you cannot avoid Div 296 in the year the SMSF disposed of an asset by taking your benefits below $3 million.
Second step
If you meet both of the requirements in first step then you use the following formula:
Percentage x your “total superannuation earnings” for the year
The method for calculating “total superannuation earnings” is discussed below.
The percentage is worked out under the following formula:
Relevant taxable income or loss - Assessable Contributions + Net exempt current pension income - The entity's non-arm's length component for the year (if any) + Pooled superannuation trust component.
(your “total superannuation balance reference amount” – the “large superannuation balance threshold” ie initially $3 million) / your “total superannuation balance reference amount”
Tax on your “taxable superannuation earnings”
The tax on your “taxable superannuation earnings” is at the rate of 15%.
The very large superannuation balance earnings component
For members with benefits in excess of $10 million, they will pay tax of 10% on the “very large superannuation balance earnings component”
First step
First you must determine if your “total superannuation balance” is greater than $10 million at the start of the financial year or at the end of the financial year – the greater of these amounts is also called the “total superannuation balance reference amount”
Second step
If you meet the requirement in first step then you use the following formula:
Percentage x your “total superannuation earnings” for the year
The method for calculating “total superannuation earnings” is discussed below.
The percentage is worked out under the following formula:
Share of Division 296 fund earnings = Average value of the superannuation interest / Average value of total superannuation interests
(your “total superannuation balance reference amount” – the “very large superannuation balance threshold” ie initially $10 million) / your “total superannuation balance reference amount”
Tax on your “taxable superannuation earnings”
The tax on your “very large superannuation balance earnings component” is at the rate of 10%.
This is in addition to the 15% on the “taxable superannuation earnings” – ie 25% tax in total for earnings on balances over $10 million
What are your “total superannuation earnings”?
Your “total superannuation earnings” are the total of your “relevant superannuation earnings” for each:
“superannuation interest”
reversionary pensions that you are entitled to receive during the year.
In effect you need to examine your benefits and reversionary pensions in each superannuation fund that you have an interest (including accumulation and pension accounts) and work out their “relevant superannuation earnings”.
But before you do that, for your SMSFs, you need to work out the SMSF’s “Division 296 earnings”.
What is the SMSF’s “Division 296 earnings”?
An SMSF will determine its “Division 296 earnings” under the following formula:
Excluding the Pooled superannuation trust component which is not relevant for SMSFs, the above terms have the following meanings:
relevant taxable income or loss
the SMSF’s taxable income for the year; or
the SMSF tax loss for the year.
This is the critical part of the legislation which ensures that Div 296 only applies to realised gains. This is because the measure is based on the member’s “share” of the SMSF’s taxable income including the SMSF’s realised capital gains (but not the SMSF’s unrealised gains).
assessable contributions
the total of the contributions that are included in the SMSF’s assessable income (eg concessional contributions).
The purpose of this exclusion is to ensure Div 296 is not triggered on concessional contributions, including super guarantee and employer contributions.
net exempt current pension income (net ECPI)
the total amount of the SMSF’s exempt income, reduced (but not below nil) by the total deductions the SMSF could make under section 8-1 if the exempt income were assessable income, to the extent attributable to the exempt income; or
for an income year that is a loss year - nil.
The purpose of adding back in this ECPI income and gains is to ensure Div 296 is payable on income and gains that are exempt at the SMSF level because the SMSF is partly or wholly in pension phase.
While this ECPI income is added back in, that ECPI income is also reduced by section 8-1 of the Income Tax Assessment Act 1997 deductions that would have been otherwise available had the SMSF not been in pension phase. Hence, the add back of net ECPI.
non-arm’s length component
Given that non-arm’s length income (NALI) is already taxed at 45% it is excluded from Div 296 tax.
What are “relevant superannuation earnings”?
Your “relevant superannuation earnings” for a “superannuation interest” is the amount attributable to the interest of the “Division 296 earnings”.
There is a general attribution principle that the amount attributable to the superannuation interest must be determined on a fair and reasonable basis, having regard to the matters prescribed by the regulations.
However, for SMSFs there is (or will be) a specific attribution principle that will be determined in accordance with regulations.
At the date of this article the proposed regulations have not been released. However, Treasury has released an “additional guidance” document.
The guidance proposes that SMSF’s methodology will be based on the member’s time-weighted share of the fund over the relevant income year and could be represented in the regulations through a formula as below:
It is likely that this would be determined by actuaries in a similar way to the standard ECPI calculations.
Example of the draft new laws
The following is a combination, and modification, of examples 1.6 and 1.2 from the EM to the draft bill:
Determining Division 296 fund earnings for the SMSF
Bugden Super is a SMSF with members who have accumulation interests and members receiving retirement phase income streams. Kelly holds about 83% of the benefits in Bugden Super.
As part of Bugden Super’s annual income tax return, it reports $650,000 of gross income, plus $90,000 of assessable contributions. It has $50,000 in gross expenses.
As Bugden Super does not set aside specific assets to support its retirement phase income stream liabilities, it uses the proportionate method to calculate its ECPI. An actuarial certificate certifies that 33.3 per cent of its gross income relates to earnings supporting retirement phase income streams (based on the proportion of the fund’s total superannuation liabilities that are current pension liabilities). Bugden Super’s ECPI is $216,667, and has $16,667 of related expenses that would have been deductions under section 8-1 if it were assessable income.
Bugden Super’s taxable income will be:
$650,000 - $216,667 - $33,333 + $90,000 (assessable contributions) = $490,000
Bugden Super’s Division 296 fund earnings will be (assuming no CGT adjustments under the transitional arrangements):
$490,000 - $90,000 + $200,000 = $600,000
Calculate Kelly’s Div 296 tax
Kelly has a TSB of $12 million at the end of 2026-27, and total superannuation earnings of $500,000 (being her approximate 83% of relevant earnings from Bugden Super’s Division 296 fund earnings).
As Kelly’s TSB is greater than the very large superannuation balance threshold of $10 million, and her total superannuation earnings are greater than nil, Kelly will have taxable superannuation earnings – including a very large superannuation balance earnings component – for Division 296 purposes.
The proportion of Kelly’s TSB above the large superannuation balance threshold of $3 million is 75 per cent (($12 million - $3 million)/$12 million). The proportion of Kelly’s TSB above the very large superannuation balance threshold of $10 million is 16.67 per cent (($12 million - $10 million)/$12 million).
Kelly’s Division 296 tax comprises two parts.
For the proportion above the $3 million threshold, she has taxable superannuation earnings calculated as $375,000 (75 per cent of $500,000).
For the proportion above $10 million, she also has a very large superannuation balance earnings component calculated as $83,350 (16.67 per cent of $500,000).
The amount of $375,000 relating to the proportion above $3 million will be taxed at 15 per cent, resulting in tax of $56,250 (15 per cent of $375,000). The amount of $83,350 relating to the proportion above $10 million will be taxed at an additional 10 per cent, resulting in tax of $8,335 (10 per cent of 83,350).
Kelly’s total Division 296 tax liability for the 2026–27 income year will be $64,585 ($56,250 + $8,335).
This on top of the income tax paid by Burgden Super of $73,500. Kelly’s notional approximate 83% share of that income being $61,005. This gives an approximate effective tax rate of 25% on Kelly’s $500,000 total superannuation earnings for the 2026-27 year.
Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E pbroderick@sladen.com.au
Philippa Briglia
Special Counsel
T +61 3 9611 0174 | M +61 449 404 801
E: pbriglia@sladen.com.au
This article was originally published on the Sladen Legal website: The new Div 296 draft legislation – Part 1 – How it works for SMSFs
