$3 Million Super Tax Overhauled: Labor changes Div 296

$3 million super tax changes

October 2025 – The Australian Government has announced significant changes to its proposed Division 296 superannuation tax, often called the “$3 million super tax.” These revisions aim to address widespread criticism and make the policy fairer and more practical. Below we break down what’s changing, when the new rules start, and how they impact individuals and super funds in an accessible way.

What Is Division 296 and Why the Change?

Division 296 refers to a new section of tax law introducing an additional tax on superannuation earnings for individuals with very large retirement balances. Under current rules, super fund earnings are taxed at 15%. The Division 296 proposal was to impose an extra 15% tax on earnings for balances over $3 million – effectively doubling the tax to 30% on those high-balance earnings. It was slated to start from 1 July 2025. However, this plan drew strong criticism because:

·         No Indexation: The $3 million threshold was not indexed, so over time more middle-class savers could get caught due to inflation.

·         Unrealised Gains: It would have taxed yearly growth in asset values even if you didn’t sell the asset, which many saw as unfair and hard to manage. For example, someone with property in their super could have faced a tax bill on its rising value without having any cash proceeds.

·         Illiquid Assets: Many Self-Managed Super Funds (SMSFs) hold assets like farming properties or small businesses that can’t be easily sold or partially sold just to reduce the balance. Taxing these unsold assets could have forced difficult financial decisions.

Facing months of pushback from industry experts, economists, and even within the governing party, the Treasurer Jim Chalmers went back to the drawing board. On 13 October 2025, Chalmers unveiled a reworked Division 296 plan addressing those concerns. “This is difficult tax reform… but we’ve worked to make it fairer and more sustainable,” the Treasurer said of the changes. The overhauled policy introduces the key adjustments listed above – notably dropping the tax on unrealised gains, adding a higher $10 million tier, indexing the thresholds, and delaying commencement to 2026.

Impact on Individuals and Super Funds

These changes largely target a small minority of wealthy super members and should not affect the average Australian’s retirement savings. Only an estimated 0.5% of Australians (around 80–90 thousand people) have super balances above $3 million. For those fortunate few, Division 296 means paying more tax on the earnings of their super – but now with important safeguards: the extra tax will only hit actual realised profits, and it will only apply to the portion of a balance above the $3 M or $10 M thresholds, not the entire balance. This tiered approach ensures, for example, that if someone has $4 million in super, only the earnings on the last $1 million are taxed at the higher rate. Those with mega-super balances over $10 million will see a larger tax bite on that portion (40% total tax on earnings beyond $10 M), reflecting a push for greater equity.

For superannuation funds themselves, the new approach should be easier to administer than the original proposal. Large APRA-regulated funds will likely need to report members’ balances and earnings to the ATO, and affected individuals may be issued a tax assessment (similar to how existing high-income Division 293 super taxes are handled). Individuals can then choose to pay the Division 296 tax from their pocket or have their super fund release money to cover it. Importantly, self-managed super funds with illiquid assets (for instance, a family farm held within an SMSF) will not be forced to pay tax on a mere paper valuation increase each year. They would only owe extra tax if and when those assets produce actual income or are sold for a gain, easing earlier liquidity concerns. Overall, everyday super savers with balances below $3 million will see no change – their super earnings remain taxed at the standard 15%.

Reactions from Experts and Government

The response to the revised Division 296 has been broadly positive among industry experts. CPA Australia, the largest accounting body, praised the “common-sense” changes, noting that taxing unrealised gains would have been “unjust” and that linking the $3 million cap to inflation was vital to protect future retirees. The Self-Managed Super Fund Association also welcomed the government’s backdown on taxing paper gains, with its CEO Peter Burgess saying the decision will send “waves of relief” through the SMSF community those unsold asset taxes and fixed threshold were the two most contentious issues for small super funds. Even Paul Keating (former Prime Minister and architect of Australia’s super system) gave a nod of approval, reportedly commenting that taxing only on realisation “solidifies super arrangements for the long-term security of retirement savings”.

Government officials maintain that the core goal is intact. Division 296 is still expected to make the super system more sustainable by trimming generous tax concessions for multi-million–dollar accounts. By finding a more palatable way to achieve this – no longer taxing unrealised growth and adjusting the thresholds – the policy now stands a better chance of passing Parliament in early 2026. “The government has listened to our concerns… The outcomes will help make Australia’s superannuation system fairer and more equitable,” said Richard Webb, head of superannuation at CPA Australia, urging lawmakers to move forward with the revised law.

What’s Next?

With a start date of 1 July 2026, the new Division 296 tax rules will undergo the formal legislative process. The bill is expected to be introduced with the changes outlined above and, given improved support from crossbench senators, is likely to pass. Affected individuals (roughly 0.5% of super members) have some time to plan – some may consider financial strategies like adjusting contributions or using other investment vehicles if their super balance is nearing the thresholds. For most Australians, however, superannuation continues as usual, unaffected by these high-balance tax tweaks.

In summary, the government’s recalibration of the $3 million super tax (Division 296) removes the harshest elements (no tax on unrealised gains and an inflation-proof cap) while still ensuring that those with extra-large retirement nest eggs contribute a bit more to the nation’s coffers. It’s a balancing act between raising revenue and maintaining fairness in the super system – one that appears more politically and practically viable after these changes.

Further Resources: For those interested in more details, consider reviewing the official Treasury announcements and analyses by professional bodies. The Treasurer’s Media Release (13 Oct 2025) and explainer articles by financial advisors and accounting firms (e.g. Hudson FP’s October 2025 update or CPA Australia’s commentary) provide deeper insight into the changes and their rationale.