Division 296 Is Active Legislation — Not a Proposal

Division 296 tax passed Parliament in March 2026 and has effect from 1 July 2025.
This is confirmed law, included in the 2026 Budget. There is no further vote required.
If your total super balance exceeded $3 million at 30 June 2025, your first Division 296 assessment will arrive in the 2025–26 tax year.
The $3 million threshold is not indexed to CPI — it will capture more Australians every year as super balances grow.

What Is Division 296 Tax?

Division 296 is a new tax measure that imposes an additional 15% tax on the superannuation earnings of individuals whose total superannuation balance (TSB) exceeds $3 million. It was introduced as a revenue measure to make the superannuation system "more sustainable and equitable" by reducing the tax concessions available to very large super balances.

Before Division 296, all earnings inside a complying super fund were taxed at 15% (accumulation phase) or 0% (pension phase, subject to the transfer balance cap). Division 296 effectively adds a second layer of 15% tax — bringing the marginal rate on earnings above the $3 million threshold to 30% in accumulation phase or 15% in pension phase — on that portion of earnings.

Crucially, unlike almost every other tax in the Australian system, Division 296 taxes unrealised capital gains — increases in the value of assets that have not yet been sold. For SMSF members holding direct investment property, this creates a unique and significant cash-flow problem.

The $3 Million Threshold: How It Works

The threshold is assessed at the individual member level, not at the fund level. This means:

The $3 million test applies to your total super balance across all funds — not just your SMSF balance.
If you have a $1.5 million SMSF and a $1.8 million industry fund, your TSB is $3.3 million and Division 296 applies to the portion above $3 million.
Division 296 tax is assessed on your personal income tax return, not on the fund's tax return. It is a personal liability.
You can elect to have the tax paid from your super fund (reducing your member balance), or pay it personally from other assets.

The threshold is not indexed. $3 million in 2025 will be worth significantly less in real terms by 2035. At 3% average wage growth, a person with a $2.5 million balance today who contributes at employer SG rates could cross the threshold within 5–8 years — without ever having been a "wealthy" superannuant by future standards. More Australians will be caught by this tax each year it operates without indexation.

How "Earnings" Are Calculated — Including Unrealised Gains

This is the most controversial aspect of Division 296 — and the most important one for SMSF property investors. The ATO calculates "earnings" using a simple formula:

Earnings = Closing TSB − Opening TSB + Withdrawals − Contributions

Where TSB at each date includes the market value of all assets — including direct property at its current market value.

Because the calculation uses market value at 30 June each year, any increase in the value of property held inside the SMSF — even if the property has not been sold — is included in "earnings" for Division 296 purposes. The property does not need to generate any cash income. The unrealised capital appreciation is treated as a taxable earning.

This is different from how CGT works in other contexts, where a taxable event only occurs on disposal. Division 296 effectively applies an annual mark-to-market approach to super fund assets.

Proportioning the earnings

Only the portion of earnings attributable to the balance above $3 million is taxed. The formula is:

Proportion = (TSB − $3,000,000) ÷ TSB

Taxable earnings = Total earnings × Proportion

Division 296 tax = Taxable earnings × 15%

Worked Example: $4.5 Million TSB, SMSF With Direct Property

Consider an SMSF member with the following position at 30 June 2025:

Total super balance (TSB): $4,500,000
SMSF assets: Direct investment property valued at $2,500,000 + cash and shares of $1,500,000
No other super fund

StepCalculationAmountExcess balance above $3m threshold$4,500,000 − $3,000,000$1,500,000Proportion of earnings attributable to excess$1,500,000 ÷ $4,500,00033.33%Property growth during year (7%)$2,500,000 × 7%$175,000 unrealisedTotal fund earnings (property growth + other investment returns)$175,000 property + estimated $90,000 on other assets$265,000Earnings attributable to excess portion$265,000 × 33.33%$88,333Division 296 tax payable$88,333 × 15%$13,250 The $13,250 Division 296 tax must be paid in cash — either from the member's personal assets or from liquid assets inside the SMSF. The investment property itself cannot be sold to pay this tax without significant disruption (and will itself trigger CGT). If the SMSF has limited cash holdings, the member must either contribute personal cash to the fund to meet the liability or sell fund assets.

The Cash-Flow Problem for SMSF Property Investors

For SMSF members holding shares or fixed income, the Division 296 tax liability can typically be met from dividends, interest, or by selling a small parcel of liquid assets. But direct property inside an SMSF creates a structural cash-flow mismatch:

The property grows in value each year — generating an unrealised gain that is treated as "earnings."
That growth is not accessible as cash until the property is sold.
But the Division 296 tax bill arrives every year based on that unrealised growth.
The SMSF must hold sufficient liquid assets to meet the annual tax without being forced to sell the property.

In practice, this means SMSF members holding direct property near the $3 million threshold need to maintain a meaningful cash buffer — or face compulsory asset sales at potentially unfavourable times.

Division 296 Annual Tax — By Total Super Balance (7% fund growth)Bar chart with four columns showing estimated Division 296 tax. $3M (no excess): $0. $3.5M: approx $5,250. $4M: approx $10,500. $5M: approx $21,000. Estimated Annual Division 296 Tax

Assumes 7% total fund growth (incl. unrealised property gains). All figures are estimates.

$5K

$10K

$15K

$20K

$25K

$5,250

$10,500

$21,000

$3.0M TSB

(at threshold)

$3.5M TSB

$4.0M TSB

$5.0M TSB

Estimates only. Actual tax depends on opening/closing TSB, contributions, and withdrawals. Seek professional advice.

The LRBA Interaction Warning

Limited Recourse Borrowing Arrangements (LRBAs) inside SMSFs are a popular way to purchase investment property with leverage. Division 296 makes LRBAs significantly more punishing for members approaching the $3 million threshold — for a compounding reason:

The SMSF borrows to purchase a $1.5 million property. Member balance is currently $2.8 million (below $3 million — no Division 296 tax yet).
Property grows 7% per year. After 2–3 years the property is worth $1.73–$1.84 million. Member's total balance reaches or exceeds $3 million.
Division 296 now applies — but the fund has limited cash because loan repayments absorb most of the rental income.
The very growth that pushed the balance over $3 million now generates an annual Division 296 tax bill, payable in cash, from a fund with minimal liquidity.

SMSF trustees using LRBAs to hold property should model the point at which their total super balance is likely to exceed $3 million and ensure they have a plan to fund Division 296 tax from that point.

The CGT Interaction: Paying Twice?

A common and legitimate concern is that Division 296 appears to impose tax on unrealised gains each year, and then when the property is eventually sold, a CGT event occurs and the gain is taxed again. This is partially correct and partially mitigated:

Division 296 tax is not a credit against CGT. It is a separate, additional tax on the same economic gain.
However, the CGT calculation inside the fund uses the actual cost base and sale price — it does not "double count" the Division 296 already paid in that sense (the gain is only recognised for CGT at disposal, not inflated by prior Division 296 assessments).
The practical effect is that a long-held property can attract Division 296 tax on unrealised growth for many years, and then attract CGT on actual disposal — with no relief for the prior Division 296 payments.
The fund's existing 1/3 CGT discount for assets held over 12 months in accumulation phase is unchanged by Division 296.

Decision Framework: When to Reconsider SMSF Property

Not every SMSF property investor is affected — only those approaching or above $3 million total super balance. The following framework helps identify where action may be needed:

Your situationDivision 296 statusSuggested actionTSB well below $2.5 millionNo impact for nowMonitor annually. Note threshold is not indexed.TSB $2.5 million – $3 millionApproaching threshold — likely to cross within 3–5 yearsModel impact. Review SMSF liquidity. Discuss contribution strategy with adviser.TSB $3 million – $4 million, SMSF holds direct propertyDivision 296 applies nowCalculate annual liability. Ensure sufficient fund liquidity. Review LRBA if present.TSB above $4 million, large direct property holdingSignificant annual Division 296 liabilitySeek specialist SMSF advice urgently. Consider whether SMSF property continues to make sense.TSB above $3 million with LRBA on direct propertyCompounding problem: growth triggers tax, limited liquidityPriority review with SMSF specialist. May need to restructure or sell property within fund. Frequently Asked Questions

Can I just move the property out of my SMSF to avoid Division 296?

Transferring investment property out of an SMSF is generally not permitted under superannuation law — SMSFs cannot transfer assets to members except in very limited circumstances (e.g., in-specie benefit payments at retirement, or business real property in certain situations). Selling the property inside the fund and distributing the proceeds as a pension or lump sum is possible depending on your age and preservation conditions, but triggers CGT inside the fund at the time of sale. There is no blanket "rollover" relief to move property out of super to avoid Division 296.

What if the property falls in value in a year — do I get a Division 296 refund?

If the fund's earnings for the year are negative (i.e., the closing TSB is lower than the opening TSB after adjusting for contributions and withdrawals), there is no Division 296 tax payable for that year. Negative earnings can also be carried forward to offset future positive earnings for Division 296 purposes — similar to how losses reduce future taxable income. However, this carry-forward only applies to Division 296 calculations, not to the fund's general income tax.

How is the property valued for Division 296 purposes each year?

SMSFs are already required under ATO rules to value assets at market value at 30 June each year. For direct residential or commercial property, this means commissioning a formal independent valuation or obtaining a credible market estimate (e.g., from a registered valuer or supported by comparable sales evidence). The ATO expects valuations to be based on objective and supportable data. Undervaluing property to reduce Division 296 tax is a compliance risk. The same valuation used for the SMSF annual audit is used for Division 296 earnings calculations.

My spouse and I both have SMSF balances. Is the $3 million assessed on our combined balance?

No. Division 296 is assessed individually. Each member is assessed against their own total super balance independently. If one spouse has a $3.8 million TSB and the other has a $2.2 million TSB, only the $3.8 million member is subject to Division 296. The combined $6 million is irrelevant — there is no joint assessment. This also means the fund itself may have two members, one paying Division 296 and one not, which adds complexity to fund administration and trustee obligations.

Can I elect to have Division 296 tax paid from my super fund rather than my personal assets?

Yes. Members can elect to have some or all of their Division 296 tax liability paid directly from their super fund. The ATO issues a "release authority" to the fund trustee, who can then release the funds to the ATO without it being counted as a benefit payment for superannuation purposes. This avoids the member needing to find personal cash to meet the liability, but it reduces the member's balance inside the fund — which may itself reduce the following year's Division 296 earnings base.

Does Division 296 apply to pension-phase assets in my SMSF?

Yes — this was a key feature of Division 296 that the government did not change despite lobbying. If your total super balance exceeds $3 million, earnings on the portion above $3 million are taxed under Division 296 regardless of whether those assets are supporting an account-based pension or are in accumulation phase. Previously, pension-phase assets earned income entirely tax-free. Under Division 296, that exemption only applies to the portion of your balance below $3 million.

What Should SMSF Property Investors Do?

Division 296 is active law. If your total super balance is above $3 million — or likely to cross that threshold in the next few years — the time to act is now.

Calculate your TSB across all super funds at 30 June each year.
Estimate your annual Division 296 liability based on projected fund earnings and property growth.
Stress-test your fund's liquidity — can it meet an annual Division 296 tax bill without forcing a property sale?
Review any LRBA — does the loan repayment structure leave enough cash to also meet Division 296 obligations?
Consult an SMSF specialist — the interaction of Division 296 with your fund's investment strategy, contribution limits, pension phase, and long-term exit planning requires holistic professional advice that is specific to your situation.

Division 296 is not a reason to reflexively sell property inside your SMSF — in many cases the long-term property investment still makes sense after accounting for the additional tax. But it is a reason to model the numbers carefully and ensure the structure is designed to manage the liquidity demands that come with annual taxation of unrealised gains.

Disclaimer: This article provides general information about Division 296 tax and its application to SMSF property investors. It does not constitute financial, tax, legal, or superannuation advice. Division 296 is complex legislation with many individual variables — including fund structure, member ages, pension phase, contribution history, and specific asset valuations — that affect the outcome for each person. Always consult a registered SMSF specialist, tax agent, or financial adviser before making any decision about your superannuation or investment property strategy.

Division 296 Tax and SMSF Property Investors 2026 | Propperly