From 1 July 2025, the Government has proposed an ‘additional’ tax of 15% on earnings on an individual's total superannuation balance (TSB) over $3 million at the end of a financial year. The recent release of the draft legislation has confirmed this will be known as the DIV296 tax.

This proposal will affect individuals with a total superannuation balance that exceeds $3 million and will be an additional tax only on the proportion of earnings that exceeds this cap.

For members with a TSB over $3 million at the end of a financial year, a 15% tax is proposed to be levied on the movement between the member’s opening and closing total superannuation balances for the year. This movement is referred to as the 'earnings' amount and is adjusted to add back withdrawals, subtracting contributions and adjustments for other specific exclusions such as:

• Limited recourse borrowing arrangements (LRBA) which are otherwise included in a TSB;

• In-transit rollovers;

• Interest in a foreign superannuation fund; 

• Receipt of a superannuation income stream because of death of another person (death benefit pension)

For example, if a property within the superannuation on 1 July 2025 is valued at $1.4 million, and on 1 July 2026 is valued at $1.8 million, the tax will be calculated to include the increase in asset value of $400,000.

Furthermore, the additional tax only applies to the proportion of assets over $3 million.

Calculating DIV296 tax

The current calculation method proposed is as follows:

• Step 1: Calculate the earnings

Earnings = (TSB current FY + Withdrawals – Net Contributions) – TSB Previous FY

• Step 2: Calculate the proportion of earnings attributable to superannuation balances exceeding $3 Million

Proportion of earning = (TSB Current FY - $3Million) / TSB Current FY

• Step 3: Calculate your tax liability

DIV296 Tax = 15% x Earnings x Proportion of earnings

If you incur a loss in earnings, you will carry it forward until you can apply it against earnings in a following year. A loss in the movement of a funds earnings does not result in a refund of tax paid.

Daniel Butler, an SMSF lawyer from DBA Lawyers shared an example that shows what the effective tax rates could be whilst having a fund over $3 million.

An example of the effective tax rate for different scenarios

On 1 July 2025;

• An individual has a $5 million asset

• They will acquire an asset that will increase 7% pa capital and 3% pa income.

• The asset will be sold after 10 years for over $9 million

This scenario has the following options:

The average tax rates over time indicate that there are significant SMSF tax benefits for our clients. This is particularly true when utilising the pension component and the SMSF structure. Clients should talk to their advisor about the best structure to save taxes for all their businesses and investments.

How to pay the tax

The ATO will raise and levy Div296 tax against the individual member, not the super fund. The proposed legislation will give the individual the choice to release this amount from super or pay it personally. Members with multiple super funds will be able to choose which fund the payment comes from.

Key Considerations

• A member’s total superannuation balance includes unrealised gains or losses, effectively meaning that the 15% tax will also be calculated on movements in unrealised asset valuations during a relevant year. This may cause cash flow problems as tax has to be funded on assets that are yet to realise their value.

• Negative earnings during a financial year will be carried forward and used to offset future 'earnings'. The proposed legislation does not include a refund in tax when there is a ‘loss’ incurred on the TSB. If a member falls below the $3 million cap the benefits of potentially applying these losses won’t be realised.

• There's currently no mechanism in place for the $3 million threshold to be indexed.

What now?

The Government allowed a two-week period for professional bodies to submit a paper. This period started after the draft legislation was released. Findex has relationships with organisations that submitted papers and we discussed the problems we found, which covers what is discussed above. We are confident they have addressed those issues.

You can tailor different strategies, both inside and outside an SMSF, to get the best tax benefits for your situation. The most effective strategy is a financial model that takes into account your specific needs and circumstances. To learn more about the advantages of an SMSF, and how you can create or optimise your SMSF, contact our team of SMSF Advisors today.

Disclaimers

The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex Group Limited.

This article contains general information and is not intended to constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.

The title 'Partner' conveys that the person is a senior member within their respective division and is among the group of persons who hold an equity interest (shareholder) in its parent entity, Findex Group Limited.  The only professional service offering which is conducted by a partnership is external audit, conducted via the Crowe Australasia external audit division and Unison SMSF Audit.  All other professional services offered by Findex Group Limited are conducted by a privately-owned organisation and/or its subsidiaries.