Raymond Pecotic: Five tips to bypass the Division 296 $3m super tax blitz (even if you’re not there yet)

Considering it was barely spoken about during the recent Federal election campaign, a lot of noise is now being made about the new proposed tax on superannuation.

Division 296 is being pitched as a “modest” 15 per cent additional tax on earnings for those with super balances over $3 million that only affects 0.5 per cent of the population.

But behind the spin lies a policy that’s deeply complex, potentially unworkable, and fundamentally unfair.

Why? Because it taxes unrealised gains. That’s right — profits you haven’t actually received.

A departure from how taxes normally work

Traditionally, Australians pay tax on realised income, meaning money that actually lands in your bank account after you’ve sold an asset. But division 296 breaks from this principle, instead taxing hypothetical paper increases in asset values.

For example, if your self-managed super fund holds a $3m commercial property that is revalued to $3.6m, you could be liable for thousands in tax. But unless you are planning to sell the property, that money doesn’t actually exist.

This isn’t just a tax on wealth; it’s a tax on how wealth looks on paper, regardless of how liquid or accessible it is. And that opens a can of worms, particularly for SMSFs holding assets that can’t easily be sold off in pieces.

Are you in the firing line?

You might think: “I’m not worth $3m so this won’t affect me.”

But that threshold is not indexed so it won’t rise with inflation or market growth. With even modest annual growth, many Australians will find themselves caught in the division 296 net over the next decade.

And if a proposal by the Greens to reduce the threshold to $2m gains traction, the impact will extend to middle-class Australians who have simply done the right thing — saved consistently, invested wisely, and planned for the future.

So what can you do?

Division 296 requires a smart, proactive approach to reduce or avoid it. Whether you’re already over the threshold or just approaching it, now is the time to reassess your strategy.

Key strategies to consider

Timely and appropriate valuations: SMSFs aren’t required to revalue real estate every year unless there is a material event. Trustees can exercise discretion around valuation timing, but getting your valuations right is going to be super-important if you are over, or approaching, the $3m threshold. Review your valuations. If you are under the $3m threshold, have you been a bit optimistic with your values at a time when it didn’t perhaps seem so important to address it? Getting a realistic valuation can make the difference between crossing the $3m line or not.

Conversely, if you are over the limit already — if you have not revalued your real assets for some time, and your valuations may be a bit undercooked — you may get the rude shock of a tax bill when the next revaluation is done while division 296 is in place. If your assets are under or overvalued, make sure you address this, and ensure they are valued appropriately to avoid hitting the threshold too soon, or experience a big rise at the wrong time.

Asset structuring: It’s time to rethink your asset mix and where you choose to hold them. Some assets may be better held outside of super, especially if they are illiquid or lumpy.

Holding speculative, illiquid assets in super used to be a sound approach. Speculating in an environment where you had lots of time for assets to meet their potential, and where capital gains were expected in a concessionally taxed environment, made sense. But in the proposed environment this could create serious issues if tax is levied on yet-to-be realised, illiquid shares.

You could consider transferring property into your personal name, family trust or company to reduce your total super balance, although land tax, future capital gains tax, and asset protection need to be considered.

It’s not a one-size-fits-all solution, but for many it’s worth modelling the options.

Gifting and succession planning: There could be some very happy adult children receiving assets from their parents sooner than they expected. Passing assets to children can reduce your super balance, but it brings its own tax implications and control issues.

Proper timing, legal structuring, and aligning with your estate planning goals is essential.

Recontribution and super splitting: If you’re over preservation age, drawing down and recontributing to a spouse’s fund under the threshold can lower your balance. Likewise, super splitting — allocating concessional contributions to a spouse with a lower balance — is making a comeback.

Previously used for Centrelink benefits, it will now play a vital role in division 296 planning, and should be considered for more people, and sooner, than we did before.

Alternative investment structures: Tax-effective vehicles like insurance bonds or investment bonds held outside super can be useful for building long-term wealth without affecting your total super balance. While not suitable for everyone, they offer concessionally taxed compounding growth without increasing your division 296 exposure.

The clock is ticking

Division 296 is still not passed through Parliament. The Opposition is opposing it, and the Government is reluctant to concede to the Greens’ demands, so we are yet to know exactly how it will look.

But assuming we will see it come into effect at some point, in some form, it is important to know your options and be prepared.

Smart investors need to seek the right advice from qualified advisers, model their likely super balance trajectory, identify strategies that make sense for their circumstances, and act before the rules catch up with them.

If you wait until your 2026 tax bill arrives, it will be too late.

Raymond Pecotic is the managing director of Empire Financial Group