Super Changes 2025-26: What the $3M Tax Cap Means for Your Retirement

Published 2 May 2026 · By Maciej Stanek & Imran Amjad, Véurr Financial Planning

Hello. I’m Maciej Stanek, Senior Financial Adviser and Director at Véurr Financial Planning. Today I want to walk you through Division 296 — the new superannuation tax that came into effect on 1 July 2025. If your super balance is anywhere near $3 million, this directly affects you, and the first assessment period is already underway. The decisions you make before 30 June 2026 matter.

I’ll be honest with you about why this article exists. Over the past few weeks, Imran and I have had multiple enquiries along the lines of: “What does this $3 million super cap mean for me?” The answers we’re giving are different for almost every client — because the practical impact depends on your scheme, your balance, your earnings trajectory, and your timing options.

One client I met recently — a senior APS officer in PSS, in his late 50s — was projected to cross the $3 million threshold within 18 months without any action on his part. He had no idea. He thought the tax only applied to people who were already over $3 million today. By the time we’d modelled his position, we identified multiple actions he could take that would meaningfully reduce his Division 296 exposure for years to come. None of them were complicated. He just hadn’t known he needed to think about them.

This article explains what Division 296 is, who it affects (including a significant issue for CSS and PSS members), how the calculation works, and what you might want to consider.

One important note before we continue: this is general information only. It is not personal financial advice. Your situation is unique. Before making any decisions about your superannuation, please speak with a qualified financial adviser who can model your specific position.

What Is Division 296?

Division 296 is an additional 15% tax on superannuation earnings attributable to Total Superannuation Balances above $3 million, introduced on 1 July 2025 under the Income Tax Assessment Act 1997. It brings the effective maximum tax rate on those earnings to 30% — double the standard 15% accumulation-phase rate.

Under the existing superannuation tax framework, earnings within super are generally taxed at 15% in the accumulation phase. Earnings in the pension phase (where you are drawing a retirement income stream) are typically tax-free.

Division 296 adds a second layer of tax on earnings for individuals whose Total Superannuation Balance (TSB) exceeds $3 million at the end of a financial year. The additional tax rate is 15%, bringing the effective maximum tax rate on those earnings to 30%.

A few critical points to understand from the outset:

• The tax applies to earnings, not your total balance. It is not a wealth tax.
• The $3 million threshold is not indexed — it will not increase with inflation, meaning more people will be caught by this measure over time.
• The tax applies across all of your superannuation interests combined, not per fund.
• Critically, unrealised capital gains are included in the earnings calculation. You may be taxed on gains you have not yet received.

Who Is Affected?

The Government initially estimated that around 80,000 Australians would be affected at commencement. However, because the $3 million threshold is not indexed, that number will grow substantially over time as wages, contributions and investment returns push more balances above the cap.

In our experience advising clients across Canberra, Sydney and Melbourne, the individuals most likely to be affected include:

• Senior Australian Public Service employees — particularly SES-band officers with long careers and generous employer contribution rates
• Members of Commonwealth defined benefit schemes (CSS and PSS) — this group faces a unique problem we address in detail below
• Medical professionals and specialists — often with decades of high contributions
• Business owners who have used super as a primary wealth-building vehicle
• Self-managed super fund (SMSF) trustees with concentrated property or equity holdings
• Anyone who has received a large inheritance or insurance payout within super
• Those Australians who have worked to build significant wealth in superannuation over the course of their lives

If your total super balance is above $2.5 million, you should be monitoring your position closely — a strong investment year could push you above the threshold.

How Is the Tax Calculated?

The Division 296 calculation uses a proportional method based on your Total Superannuation Balance at two points:

1. Your TSB at the start of the financial year (or the date you first had a super interest, if later)
2. Your TSB at the end of the financial year (30 June)

The calculation broadly works as follows:

Step 1: Determine your earnings

Your “adjusted total superannuation earnings” are calculated as:

TSB at end of year − TSB at start of year + withdrawals − contributions

This figure captures the net movement in your balance attributable to investment performance, including unrealised gains and losses.

Step 2: Determine the proportion above $3 million

If your closing TSB exceeds $3 million, the proportion of earnings subject to Division 296 is calculated using the formula:

(TSB at end of year − $3,000,000) ÷ TSB at end of year

Step 3: Calculate the tax

The additional tax liability is:

Adjusted earnings × proportion above $3M × 15%

The ATO will issue a Division 296 assessment after the end of the financial year. You will have the option to pay the tax personally or elect to release the amount from your superannuation fund.

The unrealised gains problem

This is one of the most contentious aspects of Division 296. Because earnings are calculated based on the movement in your TSB — which includes the market value of your assets — you can be assessed on gains that exist only on paper.

If your fund holds property or unlisted assets that have increased in value but have not been sold, those unrealised gains form part of your assessable earnings. There is a mechanism to carry forward negative earnings in future years if values fall, but there is no refund of tax already paid on gains that subsequently reverse.

This creates a real cash-flow challenge, particularly for SMSF trustees with illiquid assets.

The Defined Benefit Problem: CSS and PSS Members in Canberra

This is where Division 296 creates a particularly difficult situation for many Canberra residents, and it deserves careful attention.

If you are a member of the Commonwealth Superannuation Scheme (CSS) or the Public Sector Superannuation Scheme (PSS), your Total Superannuation Balance includes a notional or calculated value of your defined benefit interest. This notional value is determined using a formula prescribed by the regulations — it is not a balance you can see in your account or withdraw as a lump sum.

The problem is this: the formula used to calculate the notional value of an indexed pension is 16 times the annual pension amount. An indexed pension paying $187,500 per year is therefore valued at exactly $3 million for Total Superannuation Balance purposes. Any indexed pension paying above this — or any combination of an indexed pension plus an accumulation fund, account-based pension, or SMSF that totals over $3 million in super assets — triggers Division 296.

Consider a long-serving CSS member whose indexed pension entitlement, when valued at 16×, places them above $3 million. Or a PSS member whose indexed pension plus accumulated employer and member components in another fund push the combined total over the threshold. In either case, Division 296 applies.

Under Division 296, this person may face an additional tax liability based on the movement in their notional balance, even though:

• They have no ability to withdraw a lump sum to pay the tax
• They have no control over the investment strategy of the scheme
• The “earnings” are a mathematical construct, not actual investment returns they have received

This is not a theoretical problem. It affects a significant number of long-serving APS employees in the ACT and is something we are actively helping clients navigate.

An important distinction. Division 296 should not be confused with the Transfer Balance Cap, which is a separate measure. From 1 July 2025, the general transfer balance cap is $2 million — meaning that if your total super exceeds $2 million and you want to start an account-based pension, only $2 million can move into pension phase if you want it to be tax free — if you exceed this amount, there will be tax implications for your Superannuation Pension. The remainder stays in the accumulation phase and continues to be taxed at 15% on earnings. The Transfer Balance Cap is indexed every two to three years (it was originally $1.7 million when introduced). A pension of $120,000 per year multiplied by 16 equals $1.92 million — that is Transfer Balance Cap territory, not Division 296. Different cap, different consequence.

The key planning implication. For clients who have already activated an indexed pension and are above the $3 million threshold, withdrawal options don’t exist — they will incur the additional Division 296 income tax. The clients we can genuinely help are those who have not yet activated an indexed pension but whom we can identify as future-problem cases — those whose projected pension entitlement, when valued at 16×, would place them above $3 million. With these clients, we can discuss restructure options before activation and find solutions that work in their best interests. Once an indexed pension is activated, restructuring becomes impossible.

If you are a CSS or PSS member, or you have a defined benefit interest from a state government or military scheme, and you have not yet activated your indexed pension, we strongly recommend speaking to a financial adviser to determine whether you will face this problem and to explore solutions before activation. Once activated, it is too late.

What Can You Do About It?

There is no way to “opt out” of Division 296 if your balance exceeds $3 million. However, there are legitimate strategies that may help manage your exposure. The right approach depends entirely on your personal circumstances, so consider speaking to your financial adviser before taking action.

Strategies that may be relevant include:

Consider alternative wealth structures

For some clients, structures alternative to (or alongside) superannuation may produce a better long-term outcome. These include:

• Company structures — for trading or investment activities held outside super
• Annuity products — for predictable income streams without the TSB pressure of super

Some of these require an accountant’s assistance to set up and manage, but in the right circumstances they can put a client in a better financial position than relying on superannuation alone. Whether any of them is suitable for you depends entirely on your specific circumstances and goals — this is a conversation to have with a financial adviser before making any decisions.

Review your contribution strategy

If your balance is near the $3 million threshold, the timing and amount of future contributions may be worth reconsidering. This includes salary sacrifice arrangements, personal deductible contributions, and employer contributions above the minimum.

Consider withdrawal timing

For those already in retirement or approaching it, the timing of withdrawals from super can influence your closing TSB at 30 June. This is particularly relevant if your balance is marginally above $3 million.

Spouse contribution splitting

If your spouse has a lower super balance, splitting eligible contributions may help keep both balances below the threshold. This strategy has limitations and eligibility requirements that should be discussed with your adviser.

Pension commencement strategies

The interaction between accumulation and pension-phase balances, and how they contribute to your TSB, is complex. There may be advantages in reviewing when and how you commence an income stream.

Asset allocation review

Given that unrealised gains are included in the earnings calculation, the composition of your portfolio and the nature of your investments may have Division 296 implications that did not exist previously. This is worth discussing with your adviser as part of your broader investment strategy.

Act before 30 June 2026

The first Division 296 assessments will be based on your TSB at 30 June 2026. Any strategy that involves reducing your closing balance or managing your earnings for this financial year needs to be implemented before that date. Time is limited.

Common Misconceptions

We are seeing a number of misunderstandings about Division 296 in the community. Here are the most common:

“It’s a tax on my total super balance”

No. It is a tax on earnings attributable to the portion of your balance above $3 million. If your balance is $3.5 million and your earnings for the year are $200,000, the additional tax applies to approximately one-seventh of those earnings (the proportion above $3 million), not to the full $3.5 million.

“It only affects the ultra-wealthy”

At commencement, perhaps. But because the threshold is not indexed, bracket creep will bring more people into scope every year. A 40-year-old with $1 million in super today and reasonable returns could well exceed $3 million by retirement. CSS and PSS members may already be above the threshold without realising it.

“I’ll only pay tax on money I actually receive”

Unfortunately not. The earnings calculation includes unrealised gains. If your fund holds assets that have appreciated in value but have not been sold, those paper gains contribute to your assessable earnings under Division 296.

“I can just move money out of super to avoid it”

Withdrawals from super are subject to their own rules, including preservation requirements if you have not yet met a condition of release. For defined benefit members already in indexed pension phase, withdrawal from the pension stream is impossible. Any decision to withdraw from super should be made in the context of your full financial plan, not solely to manage Division 296.

Why a Review Is Worth Scheduling

The 2025-26 financial year is the first assessment period for Division 296. Your closing Total Superannuation Balance at year-end will determine whether you are assessed and how much additional tax you owe.

If you are in any of the following situations, a review is worth scheduling:

• Your total super balance is above $2.5 million (approaching the threshold)
• You are a CSS or PSS member and are unsure of your notional balance
• You have an SMSF with property or unlisted assets
• You are approaching retirement and have not reviewed your super structure recently
• You have been salary sacrificing heavily and are unsure of your current TSB

The earlier you understand your position, the more options are available to you. Some strategies cannot be implemented retrospectively once a financial year has closed.

Frequently Asked Questions

When will I receive my Division 296 assessment?

The ATO will issue Division 296 assessments after the end of the financial year, based on information reported by your super fund(s). The exact timing for the first assessments (for 2025-26) has not been confirmed at the time of writing, but it is expected to follow the standard assessment cycle. You should ensure your contact details with the ATO and your fund are up to date.

Can I pay the tax from my super fund?

Yes — unless you have a Defined Benefit Indexed Pension already activated, in which case the release-from-super option does not apply and the tax must be paid from personal funds. Otherwise: once you receive your Division 296 assessment, you can elect to have the amount released from your super fund to pay the tax. Alternatively, you can pay it from your personal funds. If you do not make an election, the ATO may issue a release authority to your fund. The decision on how to pay should be made in consultation with your adviser, as it has implications for your ongoing balance and retirement income.

I’m a CSS member with a modest pension. Am I really affected?

Potentially, yes. Your Total Superannuation Balance includes the notional value of your defined benefit interest, calculated using a prescribed formula. This notional value can exceed $3 million even when your actual pension income is moderate. You should request a statement of your calculated TSB from your fund or check your ATO online account via myGov. If you are unsure how to interpret the figure, your financial adviser can help.

What if my super balance drops below $3 million next year?

Division 296 is assessed on a year-by-year basis. If your TSB is below $3 million at the end of a future financial year, you will not incur the additional tax for that year. However, there is no refund of Division 296 tax paid in prior years when your balance was above the threshold. Negative earnings in a given year can be carried forward to offset positive earnings in future years, but this only applies to future Division 296 calculations — it does not generate a refund.

General Advice Warning

The information in this article is general in nature and has been prepared without taking into account your objectives, financial situation or needs. Before acting on any information in this article, you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. You should obtain and consider the relevant Product Disclosure Statement (PDS) before making any decision about a financial product.

Véurr Financial Planning Pty Ltd (ABN 16 635 751 423) is a Corporate Authorised Representative (No. 1307015) of Lifespan Financial Planning Pty Ltd (ABN 23 065 921 735, AFSL 229892). This article does not constitute personal financial advice. Any examples are illustrative only and do not reflect the circumstances of any particular individual. Division 296 is subject to legislative and regulatory change — you should confirm current rules with the ATO or your adviser before taking action.

Sources and further reading: ATO — Division 296 tax · CSC — Commonwealth Superannuation Scheme · CSC — Public Sector Superannuation Scheme · Treasury — Better targeted super concessions · Moneysmart — Grow your super