December 2025 Update
When Division 296 was reworked and announced in late 2025, it was widely seen as a step back from the most punitive elements of the original proposal. Unrealised gains were removed, thresholds were tiered, and the start date was deferred to 1 July 2026.
At the time, many advisers and accountants reasonably concluded that:
- the rules were now more workable, and
- there was time to address affected clients closer to 30 June 2027.
With the release of the 19 December 2025 Exposure Draft legislation and Explanatory Memorandum, that assumption needs to be revisited.
While the policy headline remains the same, the mechanics of how Division 296 operates have changed in ways that materially affect outcomes, particularly for SMSFs and other small funds.
What stayed the same from the October 2025 rework
The core architecture of the reworked regime remains intact:
- Division 296 applies to individuals with Total Superannuation Balances (TSB) above $3 million.
- An additional 15% tax applies to earnings attributable to the balance above the threshold (extra 10% tax on earnings for those with balances over $10 million).
- The start date remains 1 July 2026.
- The $3 million threshold is indexed, with higher tiers applying to very large balances.
These elements were clearly communicated in the October announcement and remain unchanged.
What has materially changed in the final drafting
The December legislation introduces several structural changes that were not apparent in the original announcement and significantly alter how the tax applies in practice.
1 – Exposure is no longer driven solely by the 30 June balance
Under the legislation released on 19 December 2025, Section 296-40 introduces a new proportioning rule.
Rather than relying only on the member’s balance at the end of the financial year, the taxable proportion of earnings is now based on the greater of:
- the member’s TSB at the start of the year, or
- the member’s TSB at the end of the year.
In practice, this means:
- being under $3 million at 30 June does not guarantee exclusion from Division 296, and
- temporary balance spikes can now drive tax exposure, even if balances reduce later.
This is a deliberate departure from the originally understood “year-end snapshot” approach and removes many traditional timing strategies. But they have allowed us the time in the first year to get out strategies sorted before 30 June 2027 with a transitional rule for “year 1” which is going to look at the End of Year number ONLY.
2 – Averaging applies to earnings, not eligibility – but it increases complexity
While the $3 million threshold itself remains a point-in-time test, the calculation of Division 296 earnings relies on:
- average fund balances, and
- time-weighted member interests.
For SMSFs, this mirrors the ECPI proportional method but now applies in a Division 296 context. Treasury has confirmed that actuarial certification will be required, even for funds that previously avoided actuarial input.
This shifts Division 296 from a conceptually simple tax into a data-heavy, modelling-intensive regime. If you have been using non-specialised software (i.e. Xero or MYOB) to do SMSF accounting they are just not going to be sophisticated enough for clients that will be impacted by these rules.
3 – Mandatory proportional attribution for small funds
Funds with six or fewer members (SMSFs) are now required to use a single proportional attribution method for Division 296 purposes.
This means:
- no asset-level streaming of earnings,
- no reliance on segregated strategies to manage Division 296 exposure, and
- no discretion to apply “fair and reasonable” alternative methodologies.
This removes flexibility but also signals Treasury’s preference for certainty over customisation for SMSFs.
4 – CGT concessions are available – but only by election
The Exposure Draft introduces an important, but complex, concession for small funds.
Under Section 296-50, SMSFs may elect to maintain additional CGT cost bases so that:
- when assets are sold, CGT discounts and concessions can be reflected in the Division 296 earnings calculation.
This is not automatic and comes with significant administrative consequences:
- dual cost-base tracking,
- asset-level reporting,
- annual disclosures, and
- alignment with actuarial calculations.
For many accountants using manual or semi-manual SMSF processes, this will not be practical without specialist software or outsourced administration support.
5 – Franking credits remain a structural flaw
One of the most significant issues in the final drafting is the treatment of franking credits.
Under Division 296:
- the grossed-up dividend (including franking credits) increases “earnings”, but
- there is no corresponding adjustment for the tax already paid at the company level.
The result is an effective tax on tax, which departs from the principles of Australia’s dividend imputation system and disproportionately affects SMSFs with high Australian equity exposure.
This issue is now the subject of industry submissions to Treasury.
Why accountants need to act earlier than expected
Although Division 296 commences from 1 July 2026, the way the rules operate means that:
- balances and transactions during the 2025–26 year will directly influence outcomes, and
- many strategies need to be assessed before 30 June 2026, not after.
This includes:
- contribution and recontribution strategies,
- pension commencements and restructures,
- spouse balance equalisation,
- asset realisation timing, and
- SMSF administration capability.
Waiting until 2027 risks losing options that are still available today.
The practical takeaway
The final Division 296 legislation is:
- more precise than the original proposal, but
- materially tougher and more complex than the October 2025 announcement suggested.
For accountants, this is not just a tax change – it is an administrative and advisory shift, particularly for SMSFs and clients approaching the $3 million threshold.
Early engagement, robust modelling, and fit-for-purpose systems will be essential.
How TAG is supporting accountants
TAG is actively:
- analysing the final legislation and Explanatory Materials,
- assisting professional bodies with submissions to Treasury,
- supporting accountants through white-label SMSF administration and technical consulting, and
- helping your clients prioritise the strategies that still work under the new rules (often requiring a Statement of Advice and therefore our self-licensed advisory service is of value to you when required).
If you have clients with balances approaching or exceeding $3 million – or if you are questioning whether your current SMSF processes are fit for Division 296 – now is the time to re-engage.
In the Spotlight
The Australian Financial Review has published a Q&A on Division 296, highlighting a key technical issue we’ve been raising since the draft legislation: the treatment of franking credits under the new $3 million super tax.
TAG Partner Michelle Griffiths was interviewed for the piece, contributing her insights on the real-world implications for clients and advisers.
Read the AFR article here: Will franking credits taxed twice under the Division 296 super tax?
Contact our team on super@tagfinancial.com.au for a complimentary strategic discussion.
Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2026. Please do not reproduce without the expressed written consent of the author.