Will Your Superannuation Be Impacted by the $3 Million Balance Tax?

The Federal Government has proposed changes that may affect individuals with superannuation balances exceeding $3 million. Announced in February 2023, the measure introduces an additional 15% tax on a portion of “earnings” attributed to balances above this threshold. The intention is to reduce the disparity created by the concessional tax treatment of large super funds. If enacted, these rules will commence from 1 July 2025.

After initial delays caused by debate over the taxation of unrealised gains and the absence of indexation for the $3 million threshold, the legislation, known as the Division 296 tax, lapsed when Parliament was dissolved for the Federal Election but is expected to be reintroduced.

How the Rules Work

At present, earnings on superannuation in accumulation phase are taxed at 15%.

If your Total Superannuation Balance (TSB - meaning all of your super, in all accounts, in accumulation and in pension phase) is under $3 million, the new additional tax would not apply.

However, for balances above $3 million, an additional 15% tax will apply to a portion of calculated “earnings” on the excess amount. Importantly, this liability will be assessed personally (rather than through the fund), and the formula used does not always align with actual investment returns.

For example:

• Opening balance: $3 million property in super.

• Closing balance: $3.5 million (an unrealised $500,000 gain).

• Excess balance: $500,000 above the threshold.

• Division 296 “earnings”: $71,450 (after proportional adjustment).

• Additional tax payable: $10,717.50 (15% of $71,450).

  
  

In this scenario, even if no income was received and the gain remained unrealised, the tax would still apply. This creates potential cash flow challenges, as the individual may need to fund the tax liability from outside super if they do not wish to sell assets.

Complexity in the Calculation

The method for determining Division 296 “earnings” is not straightforward. It adjusts for contributions, withdrawals, and other transactions to prevent manipulation, and factors such as insurance payouts or participation in schemes like the First Home Super Saver Scheme may also affect the calculation.

Given the complexity, the impact will differ significantly between individuals depending on their asset mix and contribution strategies.

How the Tax Will Be Paid

The Australian Taxation Office will issue assessments after the end of each relevant financial year (for example, liabilities for 2025–26 will be notified in 2026–27). Payment can be made either personally or by electing to release money from one or more superannuation funds.

Why Advice Matters Now

If your balance is approaching or exceeding the $3 million threshold, this proposed law could have meaningful implications for your wealth planning. The key considerations include:

• Cash flow management for potential tax liabilities.

• Strategic structuring of investments both inside and outside of super.

• Timing of contributions and withdrawals.

• Long-term implications for estate planning.

  
  

At Accord Accountants & Advisors, we can provide specific advice on how these rules may affect you and what strategies can be used to manage the impact. Superannuation is a powerful wealth-building tool, but with rules becoming more complex, proactive planning is essential.

If you think you might be affected, we encourage you to seek our advice before the legislation is finalised.