Division 296 Superannuation Tax: Critical Changes You Need to Understand

Major Changes Announced – 13 October 2025

UPDATE: On 13 October 2025, the government announced significant amendments to the Better Targeted Superannuation Concessions (BTSC) measure in response to stakeholder feedback. These changes fundamentally address the most serious concerns raised by the superannuation industry, particularly regarding the taxation of unrealised gains.

The proposed Division 296 legislation has undergone substantial revision since its original announcement in February 2023. Understanding both the original proposal and the recent amendments is essential for anyone with substantial superannuation balances.

Overview of the Revised Division 296

Commencing 1 July 2026, the legislation will impose additional tax on earnings from superannuation balances exceeding specific thresholds. The revised structure includes:

• $3 million to $10 million: Additional 15% tax (creating an effective 30% total tax rate on earnings in this range)
• Above $10 million: Additional 25% tax (creating an effective 40% total tax rate on earnings above this threshold)
• Both thresholds will be indexed to CPI to maintain relativity with the Transfer Balance Cap

The Critical Change: Realised vs Unrealised Earnings

The most significant amendment announced on 13 October 2025 is that the earnings calculation has been adjusted so the concessional tax rates on large balances will now only apply to future realised earnings, rather than unrealised capital gains.

This represents a fundamental shift from the original proposal. The initial legislation would have taxed the growth in superannuation balances whether or not assets had been sold or cash had been generated—a departure from traditional income tax principles established in cases such as Commissioner of Taxation v Sun Alliance Investments Pty Ltd (2005) 225 CLR 488.

Under the revised approach, the additional tax will only apply when gains are actually realised through asset sales or other transactions that generate cash. This substantially addresses the liquidity concerns that dominated discussions since the measure was first announced.

Important Note: Treasury will consult on implementation details including the best approach to the calculation of future realised gains and attribution to individual fund members. The final mechanics of how this will operate are still being developed.

Why This Change Matters

The shift from taxing unrealised to realised earnings addresses the single most significant concern raised by stakeholders, particularly those holding illiquid assets.

Original Proposal – The Problem

Under the original proposal announced in February 2023, an SMSF holding commercial property valued at $4 million that appreciated by $500,000 in a financial year would face a tax liability on that unrealised gain, despite:

• No sale occurring
• No cash being received
• Limited rental income potentially available to fund the liability

This created severe challenges, particularly for primary producers holding agricultural land.

Revised Proposal – The Solution

Under the amended proposal effective from 1 July 2026, the additional tax would only be triggered when:

• The property is actually sold and gains are realised
• Cash is received from the transaction
• Funds are available to pay the tax liability

This aligns more closely with traditional taxation principles and eliminates the forced sale scenario that concerned many stakeholders.

Who Will Be Affected?

This legislation will primarily impact individuals with superannuation balances exceeding $3 million, including:

• High-net-worth individuals with substantial accumulation phase balances
• Self-Managed Superannuation Fund (SMSF) members holding significant assets
• Business owners who have used superannuation as a wealth accumulation strategy
• Property investors with real estate holdings in superannuation
• Primary producers with agricultural land in SMSFs
• Professionals and executives with large employer contributions over many years

The addition of indexation to both thresholds means these amounts will increase with inflation, ensuring the measure continues to target only those with very large balances rather than gradually capturing more individuals over time.

Implications for Different Asset Types

While the move to taxing only realised earnings significantly reduces concerns, different asset types still present varying considerations:

Liquid Assets (Listed Shares, Managed Funds, Cash)

These assets can be sold relatively easily when gains are realised. The timing of asset sales can be managed strategically to optimise tax outcomes. Investors maintain control over when gains are crystalised and tax becomes payable.

Commercial and Residential Property

Property investments involve longer-term holding strategies, but the realised earnings approach means:

• No tax liability arises simply from property value appreciation
• Tax only becomes payable when property is sold
• Rental income below $3 million threshold continues at 15% tax rate
• Sale timing can be planned to manage tax obligations

Agricultural Land

While the concerns about agricultural land have been substantially reduced, primary producers still face unique considerations that warrant specific attention (see dedicated section below).

Private Company Shares and Business Assets

These assets often cannot be easily sold, but under the revised proposal:

• No tax arises from business value growth until sale
• Business succession planning timelines are not forced by unrealised gain taxation
• Actual exit or succession events trigger the tax when cash is generated

Key Legal and Strategic Considerations

1. Self-Managed Superannuation Funds

SMSFs remain subject to important legal obligations under the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act):

• Trustee obligations: Under sections 52 and 52A of the SIS Act, SMSF trustees must ensure the fund can meet its liabilities, including tax obligations
• Investment strategy: The fund’s investment strategy should be reviewed to consider the implications of Division 296, particularly for balances approaching or exceeding the thresholds
• Sole purpose test: All investment decisions and asset holdings must continue to satisfy section 62 of the SIS Act requirement that SMSF assets are maintained solely for retirement purposes
• Asset realisation planning: While forced sales to pay tax on unrealised gains are no longer a concern, strategic planning around when to realise gains remains important

The shift to taxing realised earnings significantly reduces the legal risk for SMSF trustees, as they are no longer required to maintain liquidity for tax on unrealised appreciation.

2. Estate Planning Implications

Many high-net-worth individuals have incorporated superannuation holdings into their succession and estate plans. Division 296, even in its revised form, necessitates review of these arrangements:

• The tax will reduce superannuation death benefits payable to beneficiaries when gains are realised
• Binding death benefit nominations should be reviewed to ensure they remain optimal
• The timing of asset realisations can be strategically planned as part of estate planning
• The interaction between superannuation and non-superannuation assets in estates requires consideration of when Division 296 tax may crystallise

3. Business Structure and Asset Holding Review

The interaction between business structures, investment holdings, and superannuation arrangements should be reviewed:

• Related party transactions between SMSFs and business entities must comply with Part 8 of the SIS Act
• Business succession planning can now proceed on preferred timelines without forced asset sales to meet unrealised gains tax
• Any restructuring must still navigate complex tax, superannuation, corporations law, and potentially family law considerations

4. Strategic Tax Planning Opportunities

The shift to realised earnings creates new planning opportunities:

• Timing of asset sales: Gains can be realised strategically across different financial years
• Loss harvesting: Capital losses can be used to offset gains before realising larger gains
• Staged realisation: Large asset positions can be sold progressively to manage tax impacts
• Threshold management: For those near the thresholds, timing of realisations can be managed to optimise outcomes

Special Considerations for Primary Producers

While the October 2025 amendments substantially address the concerns raised by primary producers, farming families with substantial superannuation balances should still carefully consider their position.

How the Changes Help Primary Producers

The original Division 296 proposal created acute problems for farming families:

Original Problem: A family SMSF holding a 2,000-hectare grazing property valued at $5 million that increased in value by $750,000 would face a substantial tax liability despite:

• No actual sale occurring
• Farm income being fully committed to operational costs
• The property being essential to ongoing operations
• No ability to subdivide without destroying the farming enterprise

This could have forced the sale of multi-generational farms simply to pay tax on paper gains.

Revised Position: Under the amended legislation effective from 1 July 2026, the tax only becomes payable when the farming property is actually sold or when gains are otherwise realised. This means:

• No annual tax liability on land value appreciation
• No forced sales to meet tax obligations on unrealised gains
• Farming operations can continue undisturbed
• Succession planning can proceed on the family’s preferred timeline

Remaining Considerations for Primary Producers

While the immediate crisis has been averted, farming families should still consider:

1. Long-term succession planning: When the farm is eventually sold or transferred, Division 296 tax will apply to realised gains if balances exceed thresholds
2. Balances approaching thresholds: Consider whether current structures remain optimal as balances grow
3. Estate planning: Division 296 will apply to gains realised as part of estate settlements
4. Strategic timing: If farm sales are planned, consider optimal timing from a tax perspective
5. Alternative structures: Whether holding agricultural land in an SMSF remains the best long-term structure given Division 296

Options for Primary Producers

Primary producers with substantial superannuation balances now have more flexibility:

Option 1 – Maintain Current Structure: If succession is not planned for many years, the current SMSF structure can continue without immediate concern about unrealised gains taxation.

Option 2 – Gradual Restructuring: Consider whether removing land from superannuation over time (if conditions of release are met) makes sense for long-term planning.

Option 3 – Strategic Succession Planning: Plan the timing of farm succession or sale to optimize tax outcomes under Division 296.

The key difference is that these decisions can now be made on the farming family’s preferred timeline, rather than being forced by annual tax obligations on unrealised gains.

Absence of Asset-Specific Exemptions

Despite representations from agricultural and other industry groups, the legislation does not include specific exemptions based on asset type. However, the move to taxing only realised earnings effectively addresses many of the concerns that such exemptions were intended to resolve.

The indexation of thresholds is a form of concession, ensuring that the measure continues to target only very large balances rather than gradually capturing more people due to inflation and long-term superannuation growth.

Alternative Strategies and Mitigation Options

While the October 2025 amendments significantly reduce the urgency of restructuring, individuals with superannuation balances approaching or exceeding the thresholds should still consider their options.

Potential strategies may include:

• Strategic timing of asset realisations to manage tax liabilities
• Reviewing whether current superannuation structures remain optimal for long-term goals
• Portfolio rebalancing to optimize the balance between growth and tax efficiency
• Strategic use of pension phase and withdrawal strategies
• Contribution strategies involving spouses or family members where appropriate
• Estate planning restructuring to optimise outcomes for beneficiaries
• Consideration of alternative wealth accumulation structures outside superannuation for future contributions

The suitability of each strategy depends on multiple factors including age, asset composition, income needs, family situation, and long-term objectives. Implementation requires careful analysis of legal, tax, and financial implications.

Professional advice remains important for anyone who believes they may be affected by Division 296. The legislation is complex, and the final implementation details are still being settled through Treasury consultation.

Recommended Action Steps

Given the recent changes, individuals with superannuation balances approaching or exceeding $3 million should consider the following steps:

Immediate Review (Before 30 June 2026)

1. Balance Assessment: Review current superannuation balances across all funds to determine proximity to the $3 million and $10 million thresholds
2. Asset Composition Review: Consider the composition of SMSF assets and implications for future realisation events
3. Estate Plan Review: Review Wills, Powers of Attorney, and binding death benefit nominations in light of Division 296
4. Investment Strategy: Ensure SMSF investment strategies remain appropriate and compliant

Medium-Term Planning (2026-2027)

1. Monitor Legislation: The legislation must still pass Parliament, and implementation details are being consulted on—stay informed of developments
2. Strategic Planning: Consider whether current structures remain optimal as thresholds approach
3. Succession Planning: For business owners and primary producers, review succession plans in light of Division 296
4. Professional Advice: Engage with legal, accounting, and financial planning professionals to develop appropriate strategies

Ongoing Considerations

1. Legislative Monitoring: Monitor final legislation and implementation details as Treasury completes consultation
2. Threshold Indexation: Track how CPI indexation affects the $3 million and $10 million thresholds over time
3. Realisation Planning: For those exceeding thresholds, consider strategic timing of asset realisations
4. Professional Coordination: Ensure legal, accounting, and financial planning advisors are coordinating on strategies

The Legal Perspective: Trustee Duties and Compliance

From a legal standpoint, SMSF trustees should be aware of their ongoing obligations:

While the revised Division 296 significantly reduces immediate concerns, trustees remain obligated to:

• Manage the fund in accordance with the SIS Act and the fund’s trust deed
• Ensure investment strategies remain appropriate and regularly reviewed
• Maintain adequate records and comply with reporting requirements
• Consider the long-term implications of Division 296 when making investment decisions
• Plan for future tax liabilities when asset realisations are contemplated

The shift to taxing only realised earnings substantially reduces the risk of trustees being unable to meet tax obligations, but proper planning and compliance remains essential.

Why the Changes Were Made

The government has stated it listened to stakeholder concerns and made these amendments in response to industry feedback. The superannuation industry raised significant concerns about:

• The taxation of unrealised gains creating liquidity crises
• The lack of indexation meaning more people would be captured over time
• The impact on holders of illiquid assets
• The administrative complexity of calculating unrealised gains

The October 2025 amendments address each of these concerns:

• Moving to realised earnings solves the liquidity issue
• Indexation ensures the thresholds keep pace with inflation
• Realised gains are simpler to calculate and administer
• The $10 million threshold provides additional graduation

The revised package is projected to raise approximately $2 billion over the forward estimates, substantially less than the originally projected $6.2 billion, reflecting both the one-year delay and the move to realised earnings.

Current Status and Timeline

Current Status: The legislation has not yet passed Parliament. The government has foreshadowed that it will introduce legislation to implement these changes in 2026 and will engage in further consultation with the superannuation industry and other relevant stakeholders to settle implementation details.

Timeline:

• October 2025: Revised policy announced
• 2026: Legislation to be introduced to Parliament
• 1 July 2026: Proposed commencement date (if legislation passes)
• 2027-28: First year of tax collection on realised earnings

The measure still requires parliamentary approval and could be subject to further amendment during the legislative process.

Conclusion

The October 2025 amendments to Division 296 represent a significant improvement to the original proposal. By moving from taxation of unrealised gains to realised earnings, the government has addressed the most serious concerns raised by stakeholders, particularly those holding illiquid assets such as agricultural land and commercial property.

While individuals with substantial superannuation balances should still review their positions and consider strategic planning opportunities, the immediate crisis scenario that dominated discussions throughout 2023-2025 has been substantially resolved.

Key takeaways:

• Realised earnings only: Tax will only apply when gains are actually crystallised through asset sales
• Indexed thresholds: Both $3 million and $10 million thresholds will increase with CPI
• More time to plan: Implementation delayed to 1 July 2026, with consultation continuing
• Graduated rates: The $10 million threshold provides additional graduation in the tax treatment
• Primary producers protected: The forced sale scenario for farming families has been eliminated

For those holding illiquid assets, the changes are particularly significant. Primary producers can continue operating without fear of forced sales to pay tax on unrealised land value increases. Commercial property investors can maintain long-term strategies. Business owners can plan succession on their preferred timelines.

However, professional advice remains valuable for anyone approaching or exceeding the thresholds. The legislation is complex, final implementation details are still being developed, and strategic planning can optimise outcomes under the new rules.

If you believe you may be affected by Division 296, we encourage you to seek professional advice. Our firm has extensive experience in superannuation law, estate planning, and the unique needs of primary producers and business owners. We are closely monitoring the development of this legislation and would be pleased to discuss your circumstances.

Contact us today to arrange a confidential consultation.

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Important Disclaimer: This article provides general information only and does not constitute legal, financial, or taxation advice. The Division 296 legislation has not yet passed Parliament and remains subject to change. The October 2025 amendments are based on government announcements, but final legislation may differ. Every individual’s circumstances are different, and you should obtain specific professional advice tailored to your situation before taking any action based on this information. This article does not create a solicitor-client relationship.

Get in Touch: For a confidential consultation regarding your superannuation and estate planning arrangements, please contact us through our website or call our office directly.

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This article is current as of October 2025 and reflects the government’s announced amendments to Division 296 as of 13 October 2025. Readers should verify the final enacted provisions and seek updated advice prior to implementation. This article will be updated as further information becomes available.