Division 296 is designed to make high balance superannuation members pay an extra 15% or 25% on certain earnings once their total savings pass $3 million, but the way it treats franking credits and death benefits seems to shift how tax is calculated and may drag estate planning into much more complex territory.
The changes arrive after Treasury released revised legislation in December, reframing how earnings are counted for Division 296. The law now relies on a fund’s grossed up taxable income rather than a member’s net economic benefit, stepping away from the original idea of taxing the growth in a member’s balance after tax and refunds. At the same time, popular estate strategies such as reversionary pensions that automatically transfer a pension to a spouse on death are being pulled into the net, which raises questions about who pays what tax and when.
Under the revised rules, franking credits are treated as part of the fund’s assessable income rather than tax already paid, so the full grossed up dividend, including the attached franking credit, flows into the Division 296 earnings calculation. The fund may pay up to 15% tax on that income and then, where a member’s balance is above $3 million, the member can face Division 296 on the same earnings again. Professional bodies argue this approach artificially inflates taxable earnings, particularly where franking credits do not result in cash refunds and therefore can never be reinvested to benefit members. This means funds heavily invested in Australian shares could see higher relative tax simply because of how those returns are structured. Treasury accepts that this method produces a different outcome from the earlier “growth in balance” model but says it better fits the revised design, including the move away from taxing unrealised capital gains.
A bigger concern for many practitioners lies in how Division 296 interacts with death. From 2027‑28 onwards, a member’s interest remains subject to Division 296 for as long as it exists, including in the year of death, and there is no ongoing exemption beyond the single transitional year in 2026‑27. This means a deceased member’s legal personal representative may be liable for Division 296 tax for years if death benefit payments are delayed by disputes or illiquid assets, even where there is no immediate access to super money to cover the liability. In reversionary pension cases, a surviving spouse who receives a large pension late in the year could cross the $3 million threshold and have a proportion of their full year earnings hit by the extra 15%, while the deceased member’s earnings up to death are also assessed. Treasury maintains that the rules only tax earnings up to the point a member’s interest ceases and do not double count the same assets in one year, but advisers’ worked examples suggest timing differences could still boost total tax by about 50% in some scenarios.
Looking ahead, the policy appears set to proceed with further detail to come in regulations, including how small super funds will attribute earnings between members using time weighted methods. Industry groups are pushing for practical fixes such as splitting annual earnings between deceased and reversionary pensioners based on the date of death or delaying Division 296 assessment for surviving spouses for 12 months, similar to existing transfer balance cap rules. Division 296 is shaping up as the most significant super change in more than a decade and, while it looks likely to raise more tax from large balances, the final impact on estates, surviving spouses and investment choices will depend on how Treasury refines the rules before they take effect.
