This article/resource was written prior to the Federal Treasurer’s announced changes to the Division 296 tax measure on 13 October 2025.

The proposed Division 296 tax regime has sparked significant discussion, and a fair amount of confusion – around its impact on high-balance superannuation members. One persistent myth is that individuals with more than $3 million in their Total Superannuation Balance (TSB) will simply pay ‘30% tax’ on their super earnings. However, as I highlighted at the Sydney leg of the SMSF Professionals Day (May 22, 2025) and as reported by self-managed super (Assistant minister fails basic maths on tax), this is a fundamental mischaracterisation that fails the most basic principle of mathematics: you cannot simply add fractions with different denominators.

The denominator problem: 15% + 15% ≠ 30%

At the heart of the misunderstanding is the failure to recognise that the additional 15% Division 296 tax is not calculated on the same base as the existing 15% tax on taxable income. Instead, it applies to a defined concept called ‘taxable superannuation earnings’ – a figure that includes both realised and unrealised gains and is adjusted for contributions and withdrawals.

Because these two taxes apply to different earnings measures, adding them together without adjusting for a common denominator (such as taxable income) results in a misleading effective tax rate.

A case study: Jess and the 50.75% effective tax rate

I outlined the case study of ‘Jess’ at the Melbourne leg of the SMSF Professionals Day (May 27, 2025), which illustrates this distortion clearly. Jess starts the 2025-26 financial year with a TSB of $4 million and ends it with $4.5 million, after receiving $27,500 in concessional contributions. Her superannuation earnings for the year are calculated at $476,625. I’ve assumed that this is made up of:

• $200,000 taxable income, being Jess’ share of fund taxable income that has been allocated to her superannuation interest. This represents a yield of 5%.
• $276,625 is unrealised gains, being Jess’s share of total fund net increase in market value of fund assets for the financial year. This represents a growth rate of 6.9%.

Division 296 tax only applies to superannuation earnings applicable to an individual’s TSB in excess of $3 million. For Jess, as her closing TSB, at 30 June 2026, is $4.5 million, this means that 33.33% ([$– rounded to 2 decimal places) of her TSB is above the $3 million threshold.

Since only 33.33% of Jess’s TSB exceeds the $3 million threshold, that same proportion of her superannuation earnings – $158,859 ($476,625 x 33.33%)  – is subject to the 15% Division 296 tax. This amounts to $23,829.

Now here’s where the common denominator issue becomes crucial. The applicable common denominator is taxable income. Using total taxable income allocated to Jess’s superannuation balance of $200,000, the portion that is applicable to her balance over $3 million is $66,660 (33.33% x $200,000) – this is our common denominator.

The total tax imposed on the amount of $66,660 is $33,828, being the fund income tax of $9,999 (15% x $66,660), plus the Division 296 tax impose on Jess of $23,829. We can now express this as a percentage to determine Jess’ effect tax rate.

$33,828 of tax imposed in respect of taxable income of $66,660 is an effective tax rate of 50.75%.

This is a far cry from the simple ‘30% tax’ claim. The difference arises because Division 296 tax is levied on a broader measure of earnings, one that includes unrealised gains and ignores whether income was derived or tax paid at the fund level.

Why it matters

This mischaracterisation isn’t just academic, it has serious policy and communication implications. By promoting the idea that Division 296 simply aligns the tax rate for high-balance super members with marginal tax rates outside super, proponents are masking the true economic impact. The tax disproportionately affects individuals based on:

• Volatility of investment returns: Unrealised gains inflate ‘earnings’ even when no income is received.
• Fund structure and liquidity: Whilst the Division 296 tax is imposed on the individual, they can elect for the amount to be paid from their superannuation fund. For an SMSF this may cause cashflow issues – particularly if the SMSF’s investment portfolio consists of illiquid assets, e.g., real estate.
• One-off events: An isolated year of high growth can generate a substantial Division 296 tax liability without corresponding cash realisation.

Conclusion

Division 296 is not a ‘30% tax’. It is a complex, layered additional tax that interacts with superannuation earnings in a way that can lead to effective tax rates well above 30% when properly analysed.

This is a reminder that tax policy requires more than headline figures – it demands rigorous mathematical and structural analysis. As the proposed legislation moves toward implementation, advisors and clients alike must understand not just that they may be taxed, but how and why – and be prepared for the real-world implications that follow.

For my other blogs on Division 296:

• When $9 Million Doesn’t Trigger Division 296: The Carlos Conundrum
• Division 296 Tax: Why the Industry’s Objection is Not Just About the Wealthy