Don’t sell the farm yet

One of the hottest topics in superannuation right now is the impending legislative change to introduce Division 296 – the new tax on super for those with total super balances over $3m. It has certainly stirred the hornets’ nest, with reports of people already withdrawing some of their super savings to avoid having to pay this tax. However, care should be taken in doing so as withdrawing amounts from super might not be the best course of action.

It is clear that there are areas of the proposed legislation with vocal opponents. Without doubt, potential taxation of unrealised gains is causing the most friction. There may be taxation of paper gains that may never be realised. Whilst any paper losses can reduce the paper gains, and a net loss position carried forward to future years to reduce future taxable amounts under the proposed legislation, those losses can only be used where the member maintains a balance over $3M to stay within the Division 296 regime. This taxation of unrealised gains has a big and disproportionate impact for a number of self-managed super fund members, like farmers and medical professionals, who have legally structured their affairs under existing rules with property being the largest single asset as part of their retirement savings. Farmers, who are often subject to seasonal fluctuations in their earnings, may have difficulty in finding avenues to pay any Division 296 liability that arises.

The calculation methodology of effectively seeking to tax the growth from opening to closing total super balances across a financial year (with some adjustments) was no doubt chosen as being an easy calculation methodology, with few adjustments required by superannuation funds, as elements required for the calculation are already being reported. It is this reporting method that results in the taxation of unrealised gains.

No doubt there are other methodologies that could be used to calculate the amount that should be subject to Division 296 tax, but they have the potential to be more complex or may contain other elements of unfairness. 

Indexation of the $3M threshold at which the Division 296 first becomes payable is another area that has attracted much attention. There have been comments that this threshold limits the imposition of the tax to only a few (at least to start) with the number of those affected stated to be around 80,000¹. However, Treasury estimates state that the number affected could rise to 1.2M in 30 years with no indexation of the threshold. The majority of superannuation thresholds are indexed. Indeed, the most relevant threshold in this argument is the total superannuation balance threshold (based on the transfer balance cap) which is currently $2.0M.  The Division 296 tax could then be a disincentive for people to use super to save for their retirement.  More relevant though is the fact when considering a couple, if one member passes away and their balance (with insurance proceeds) is left to their surviving partner, that survivor will need to take that death benefit (if it remains in super) into calculations with their own super savings to see if they have breached the $3M threshold.  This is where many, generally older, Australians may be caught out by this new proposed tax. There is also a desire from the Greens (whose support the Government will need to pass legislation through the Senate) to actually lower the Division 296 threshold to $2.0M, but then to have it indexed into the future.

And thirdly, the start date has raised questions for many. When originally announced, the Government had stated they hoped to have the legislation passed by mid-2024 to give people time to adjust their affairs, if deemed necessary, to minimise the impact of the proposed tax, which is intended to commence from 1 July 2025. There have been no indications of a deferral of the measure from the Government, and there is nothing to stop them from “backdating” the legislation, especially given it is a measure that has been known about for some time now.  Additionally, the imposition of the first year of Division 296 tax won’t occur until the second half of 2026 (at the earliest) as the calculation of the tax liability requires the year end (30 June 2026) balance be known.

All of this then brings us back to the two fundamental questions of, first, if you wanted (or needed) to take action to minimise the impact, should you do it now, and second, should any action even be taken?

On the question of timing, there is no need to rush, especially in the absence of final legislation, if the intent is to get your super balance below $3M.  Based on the previous Bill that was before Parliament, there are two requirements for the Division 296 tax to apply, being:

1. that your superannuation earnings for the year (the amount on which the tax will be imposed) is greater than nil, and
2. that your total superannuation balance at the end of the year is greater than the $3M threshold.

Based on this, it is the balance at 30 June 2026 that will be relevant to determine if Division 296 applies.  This means that those who want to take action still have until 30 June 2026 to do so.

However, it is important to discuss the advantages and disadvantages of withdrawing amounts from super just to avoid the Division 296 tax before taking any action. If you are able to withdraw the funds from the superannuation system, then you must have satisfied a condition of release, such as being over 60 and retired, or over age 65. But you must also have more than $3M in super – otherwise why do it? If you withdraw the required amount to get below $3M, you would still have accumulated super over the general total super balance threshold of $2.0M and therefore won’t be able to make additional non-concessional contributions. In other words, if you choose to withdraw, you cannot change your mind and recontribute it back.

In all cases though, it is relevant to work out exactly how much extra tax is being paid, and from a pure taxation perspective, are you better or worse off with the money in super?  The Division 296 tax of 15% is only levied on the increase in total super balances from the beginning to the end of the year (with some adjustments) and then only on the proportion of the total super balance in excess of $3M at the end of the year.  As a simple example, if a person ended the year with a total super balance of $4M, the tax would only apply to 25% of the balance increase across the year.  If, for example, the balance grew by $250,000 from the start to the end of the year (with no contributions or withdrawals made during the year to adjust for), only 25% of this “profit” is subject to taxation under Division 296, at the rate of 15%.  This is a tax of $9,375 which, on the $250,000 profit, is an effective tax rate of only 3.75%.  If you add this to the standard 15% tax in super, it is a combined tax rate of 18.75% (ignoring any imputation credits or discounts for realised capital gains that could effectively lower the 15% standard rate to something less.

If you are considering withdrawing money from super to simply avoid having to pay Division 296 tax, then you need to consider why.  If it is simply on principle of not having to pay tax on paper (or unrealised) gains, you should pause and think whether it actually makes sense.  What will they do with the amount withdrawn?  Using the earlier example, could you invest it elsewhere to achieve an effective tax rate of less than 18.75%? Are they happy for it to potentially become an estate asset (and subject to challenge) in the event of your death? If you give it away to potential beneficiaries now, are you happy to lose control of that money? Will the money be used by those beneficiaries in the way you had hoped?

Without doubt, the proposed Division 296 tax has stirred the hornets’ nest, and some are afraid of the sting it could impose. But care needs to be taken to not make rash decisions that ultimately may leave you in a worse position, simply to avoid this proposed tax on principles. And who knows, but is there a remote chance that some of the proposed mechanisms of the Division 296 operation could change as and when the Bill makes its way through Parliament?  Either way, it’s not time to sell the farm – at least not yet.

This document has been prepared by BT Portfolio Services Limited ABN 73 095 055 208 AFSL 233715 (BTPS), the operator of Panorama Investments; and BT Funds Management Limited ABN 63 002 916 458 AFSL 233724 (BTFM) the trustee of Panorama Super, which is part of Asgard Independence Plan Division Two ABN 90 194 410 365.  Westpac Financial Services Ltd ABN 20 000 241 127 AFSL 233716 (WFSL) is the responsible entity and issuer of interests in BT Managed Portfolios. Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714 (West­pac) is the issuer of the BT Cash Management Account and the BT Cash Management Account Saver. Together, these products are referred to as the Panorama products.

BTPS, BTFM and WFSL are subsidiaries of Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian Credit Licence 233714 (Westpac) and information is current as at 18 August 2025. The information in this document regarding taxation and legislative change is based on policy announcements which are yet to be passed as legislation and may be subject to future change. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to these factors before acting on it. You should obtain and consider the relevant Product Disclosure Statement or other disclosure document, before making any decision about a product including whether to acquire or to continue to hold it.

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As the tax implications of investing in this product can impact individual situations differently, you should seek specific tax advice from a registered tax agent or registered tax (financial) adviser about any liabilities, obligations or claim entitlements that arise, or could arise, under a taxation law.  If you need more information to complete your tax return, please consult your accountant or tax adviser to obtain professional tax advice.  Please keep your BT Tax Statement and this Guide for income tax purposes. 

The information in this commentary regarding legislative changes is intended as a guide only. It is not exhaustive and does not constitute legal advice. It is based on our interpretation of the law currently in force on the date of this document. BTPS does not undertake to provide any updates to the extent that any of the laws or regulations referred to change in the future. Consequently, it should not be relied upon as a complete statement of the relevant laws, the application of which may vary, depending on your clients’ particular circumstances.

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^{1Just 1 per cent of lucrative defined benefit pension schemes to be affected by new super tax | news.com.au — Australia’s leading news site}