With the federal election looming, and the bill for Division 296 tax having lapsed, this doesn’t provide the anticipated comfort that the proposed regime has been quashed. In the forward projections announced in the recent Labor Federal budget, the income from this proposed tax remained. This would suggest that if Labor returns to power, we can expect that Division 296 will rear its head again. So many Australians should be rightly asking: Is my superannuation legacy-proof?
Understanding Division 296 Taxes
Division 296 was first proposed in 2023 as part of the Government’s ‘Better Targeted Superannuation Concessions’ and under these measures, members with a Total Superannuation Balance (TSB) exceeding $3 million will be subject to an additional 15% tax on the notional earnings relating to the portion of their balance above that threshold.
Importantly, “earnings” are calculated differently for Division 296 purposes—they are based on the change in your TSB from the beginning to the end of the financial year. This means unrealised capital gains (i.e., increases in value without any sale) are included in the calculation. There is no CGT discount applied to these gains, and negative earnings can be carried forward to offset future years' Division 296 tax.
It is this concept of taxing an unrealised gain that has aggrieved many, and imposing taxes on a notional value with no true profit or income being realised creates liquidity concerns, particularly for landowner funds. While Labor and the Greens remain committed to the introduction of Division 296 it is important to remain alert to the risks such a tax poses.
Legacy Challenges: Death Benefit Taxes
With a 15% Division 296 tax on superannuation earnings above $3 million, coupled with potential death benefit taxes for non-dependants, the structuring of investments and liquidity of superannuation funds is an important consideration.
When planning for the future, it’s essential to understand how death benefit payments and relevant taxes could impact your intended beneficiaries. A death benefit can generally only be paid to a SIS Act dependant (such as a spouse or child) or a legal personal representative, and only financial dependents (Tax act) may receive a pension benefit. This means all other beneficiaries must receive a lump sum benefit, meaning investments must exit the fund, potentially giving rise to capital gains taxes and non-dependent’s taxes.
Adult children—who often are the primary recipients of super balances—are considered non-dependants for tax purposes. This means any taxable component of a superannuation death benefit paid to them will typically attract tax at 15% plus Medicare levy. If the taxable component is from an untaxed source, the rate increases to 30% plus Medicare.
This tax can erode a significant portion of the superannuation balance you hoped to pass on.
Strategies for Minimising Division 296 and Death Benefit Taxes
While Division 296 is not law, and there’s no one-size-fits-all solution, there are a number of strategies are worth considering:
- Strategic Withdrawals: Where appropriate, members (or their authorised representatives) might consider drawing lump sums prior to death, severing the superannuation connection and allowing assets to pass tax-free via the estate. Timing, however, is critical.
- Asset Restructuring: Moving high-growth or volatile assets out of super can be beneficial, particularly where the costs of restructuring are manageable. Non-super investments may allow for better tax outcomes, especially when considering Division 296 implications.
- Reconsidering Fund Structures: Including children in superannuation arrangements, strategic use of family trusts, and re-contribution strategies may all form part of a broader legacy plan.
Of course, moving assets outside of super needs to be weighed carefully against the loss of the annual concessional tax treatment of income while invested inside a super fund, particularly where significant turnover would otherwise increase tax exposure if held personally.
Estate Planning is Key
Legacy-proofing your superannuation isn't just about minimising tax; it’s about ensuring your wealth passes according to your wishes. Key questions to consider include:
- Who controls your SMSF after death—your surviving trustees or your legal personal representative?
- Have you updated your Will and binding death benefit nominations to reflect your intentions?
- Should personal assets be redirected to beneficiaries previously intended to receive super?
Each client’s circumstances are unique, and there is no substitute for tailored advice.
As we move towards 2026, it’s clear that both Division 296 taxes and death benefit taxes have the potential to reshape superannuation and estate planning strategies. Taking proactive steps can help ensure that your wealth is protected and passes efficiently to the next generation.
If you have concerns about how this could impact your superannuation or legacy planning, now is the time to seek specialist advice.
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