The Federal Government’s introduction of Division 296 of the Income Tax Assessment Act 1997 (Commonwealth) (the Act) is one of the most significant recent changes to the superannuation system. The Act commences from 1 July 2026. Individuals with a total superannuation balance exceeding $3 million (threshold amount) at the first assessment date of 30 June 2027, will be subject to an additional 15% tax on earnings attributable to the portion of their balance above the threshold amount.
While this is often portrayed as a tax issue for high-net-worth individuals only, it is not just a tax issue. It has very real implications for estate planning, particularly on death.
What is Division 296?
The Division 296 tax applies only to the portion above that threshold and operates on a tiered basis:
- Balances between $3 million and $10 million attract an additional 15% tax on earnings attributable to the excess, resulting in an effective tax rate of approximately 30% when combined with the existing 15% superannuation fund level tax; and
- Balances above $10 million attract a further additional 10% tax on top of that, resulting in an effective tax rate of approximately 40% on earnings attributable to the portion above $10 million.
Importantly, under the Act, the tax applies to realised earnings rather than unrealised gains and it is assessed to the individual rather than to the superannuation fund itself.
Why This Matters for Estate Planning
Superannuation has always operated slightly outside the traditional estate planning framework. It does not automatically form part of a deceased person’s estate and is instead paid in accordance with death benefit nominations or, in the absence of valid and binding nominations, at the trustee’s discretion.
As a result, it provides people with a mechanism for safeguarding at least the amount of money or assets in the superannuation fund environment from being available to a claimant in a claim for provision (or further provision) from the estate. For clients with blended families, estranged relatives, or complex personal circumstances, this can provide a level of certainty and protection that simply cannot be achieved through a Will alone.
The Case for Keeping Assets in Super
For clients who are subject to Division 296, the instinct may be to withdraw assets from superannuation to avoid the additional tax. While that reaction is understandable, it is important to carefully consider the benefits that may be forfeited as a result of taking such action.
Assets that are personally held (excluding superannuation where the death benefit is directed to a nominated beneficiary and not to the Legal Personal Representative), fall into the estate and can be available to a claimant who challenges the Will. In Victoria, eligible persons, including spouses, children and, in some cases other dependants, can make a claim for provision or further provision from the estate under the terms of the Administration and Probate Act 1958 (Victoria). A successful claim can significantly alter the distribution of assets in ways the deceased did not intend.
Superannuation benefits paid pursuant to a valid binding death benefit nomination, by contrast, pass directly to the nominated beneficiary, outside of the estate and are not available to be attacked in a will challenge in the same way. For clients who have a clear view of who they want to receive their wealth, keeping assets in superannuation, even with the additional tax cost that Division 296 introduces, may provide a greater degree of certainty and protection than otherwise holding those assets personally.
This is particularly relevant for clients with blended families, where the risk of competing claims between a surviving spouse and children from a prior relationship is higher. The tax cost of Division 296 may be a worthwhile price to pay for the certainty that a binding nomination provides.
The Key Risk: Mismatch Between Payment of Tax and Beneficiaries
One of the most significant risks created by Division 296 is the potential disconnection between who receives an asset and who bears the tax.
Division 296 introduces scenarios where a tax liability arises in connection with superannuation but falls on the estate and, therefore to the estate’s beneficiaries, rather than on the person/s who actually receive the superannuation benefit, if not the estate.
This issue arises most acutely in blended family situations, or where a person has chosen to direct superannuation to a spouse while leaving the balance of their estate to children from a prior relationship. In those circumstances, Division 296 can operate so that a tax liability arises up to the point the death benefit is paid, and that liability may fall on the deceased estate, regardless of the fact the superannuation has been paid to a beneficiary directly, outside of the estate.
This creates a situation where the estate and, therefore the estate’s beneficiaries, effectively fund a tax liability relating to superannuation, that they never receive. For many clients, this is not an outcome they would have intended but it is a real risk if arrangements are not reviewed.
Impact on Surviving Spouses
Division 296 also has consequences for surviving spouses who are members of the same SMSF. When a death benefit is retained within the fund (for example, as a reversionary pension paid to the surviving spouse), it may increase that spouse’s total superannuation balance.
If the surviving spouse’s total superannuation balance is pushed above the $3 million threshold, Division 296 will apply to that person going forward. This creates an ongoing annual tax exposure on earnings attributable to the excess balance, rather than a one-off tax event. For clients who were previously below the threshold, the receipt of a death benefit retained within the SMSF can therefore create an entirely new tax position for the surviving spouse.
Timing Issues on Death
Division 296 can apply in the year of death and a liability can arise before superannuation benefits have been finalised or paid out. This may leave the estate with a tax obligation at a time when the relevant assets are still held within the superannuation environment.
Where there are delays in administering the estate or in dealing with superannuation interests, for example, due to disputes or illiquid assets in the superannuation fund, there may be ongoing exposure to tax consequences during that period.
What Should Be Reviewed
Division 296 should prompt a broader review of estate planning arrangements. In particular, people with assets in superannuation should consider the following:
- Whether death benefit nominations are consistent with their intended distribution of assets;
- Whether the Will accounts for tax liabilities that may arise in connection with superannuation;
- Whether exposure to the $3 million threshold is likely, including for a surviving spouse, after receiving a death benefit; and
- Whether assets held in self-managed superannuation funds are sufficiently liquid to meet any Division 296 liability without requiring forced asset sales.
Key Takeaway
Division 296 is not simply a tax change. It introduces new risks on death, the potential for unintended outcomes between beneficiaries, the estate and ongoing tax exposure for surviving spouses. However, the response to those risks is not always to move assets out of the superannuation environment. For many clients, the certainty and protection that superannuation provides, particularly in shielding benefits from will challenges, remains a compelling reason to maintain balances in superannuation, even at a higher tax cost.
The right answer will depend on individual circumstances and that is why a holistic review of both your superannuation and estate planning arrangements is important.
If you would like to assess your circumstances or understand how Division 296 may affect your estate planning, feel free to contact us on 03 9598 9489.
Note: This article provides general information only and does not constitute legal or financial advice. You should seek independent professional advice tailored to your circumstances.
