In a monthly Firstlinks column to assist trustees, specialist Meg Heffron explores major issues on managing your SMSF.

There’s not much good news when it comes to the draft legislation published earlier this month for ‘Division 296 tax’. This is the proposed new tax on members with more than $3 million in super – 15% tax on part of their super earnings each year.

Even the promise to allow these members to carry forward any losses (years when negative earnings cause their super balances to go backwards) has a few quirks.

Let's consider some realistic examples

To illustrate how this works, let’s use the example of Lesley with $5 million in super at 30 June 2025. Her super increases to $5.45 million during 2025/26 (the first year of the new tax) despite taking $100,000 in pension payments during the year. For the purposes of the new tax, Lesley’s ‘earnings’ will be $550,000 (her balance at the end of the year ($5.45 million) plus withdrawals during the year ($100,000) less the $5 million balance at the start of the year).

Starting balance $5,000,000 + Earnings $550,000 - Withdrawals $100,000 = Ending balance $5,450,000

At 30 June 2026, 44.95% of Lesley’s balance is over $3 million ($2.45 million out of $5.45 million). That means the tax for Lesley to pay for 2025/26 is 15% x 44.95% x $550,000, ie approximately $37,000.

$2,450,000 / $5,450,000 = 44.95%

Total earnings of $550,000 x 44.95% = $247,555 x 15% = $37,084

Imagine behind the scenes, one of the big drivers for the change in Lesley’s balance during 2025/26 was a property that started the year valued at $2 million and increased to $2.4 million. This made up $400,000 of the earnings figure, the rest came from growth in other assets and income from both the property and other assets.

Let’s say the property drops in value the following year, back to $2 million. In fact, Lesley’s whole super balance goes backwards. The fund’s income and growth in other assets wasn’t enough to compensate for the big drop in the property’s value. At 30 June 2027, Lesley’s super balance is only $5.11 million, again, after withdrawing $100,000 in pension payments.

The ATO will calculate that ‘earnings’ for the new tax are negative in 2026/27. The amount will be a ‘loss’ of $240,000 ($5.11 million plus $100,000 less $5.45 million = -$240,000).
This $240,000 will be carried forward and used to reduce Lesley’s super earnings in future.

Sounds good so far (ignoring Lesley's extra tax of $37,000 for 2025/26).

But then what might happen?

What if, the following year (2027/28), Lesley’s fund sold the property for $2 million (ie, the value never recovered). Lesley used this opportunity to withdraw a lot from super and at the end of the year, 30 June 2028, her super balance was less than $3 million. If Lesley’s super balance never rises above $3 million again, there will be no opportunity to use the ‘losses’ carried forward. They are specific to Lesley. There is no opportunity to pass them on to another member of the fund. They are also not refundable.

The net result for Lesley is that most of the earnings in 2025/26 ($550,000) came from the increase in value of the property ($400,000). But that increase disappeared the following year. Lesley has ended up paying tax on something that never actually materialised.

In fact, life could be even worse

Take Chris whose balance at 30 June 2027 was $2.9 million. In 2027/28, Chris inherited his spouse Kate’s superannuation ($2 million) which he used to commence a pension (no withdrawals were made in 2027/28). Catastrophic investment returns mean that Chris’s total super balance at 30 June 2028 is only $4 million and he has suffered a $900,000 loss.

Chris can see that he’ll be subject to Division 296 tax in the future now that he has inherited Kate’s super and it would be reasonable to assume he could at least carry forward this loss.

Unfortunately not. Losses can only be carried forward by people who have more than $3 million in super at the start of the year.

In fact, look at what happens if Chris’s super recovers the following year. Let’s say it goes from $4 million to $4.8 million after taking out his $100,000 in pension payments in 2028/29. His ‘earnings’ for Division 296 tax will be $900,000 (ie, $4.8 million plus $100,000 less $4 million).

Since 37.5% of his new balance of $4.8 million is above $3 million (ie, $1.8 million out of $4.8 million), he’ll pay Division 296 tax on 37.5% of the $900,000 earnings amount, resulting in a tax bill of over $50,000.

From Chris’s perspective, all that’s happened is that his super balance has recovered to where it was when he first inherited Kate’s super, but he’ll be taxed on that recovery.

A flawed proposal

And finally, indulge me in one small rant.

The Government consistently refers to this measure as increasing the tax rate on earnings from 15% to 30% on super balances over $3 million. It implies that the existing super fund rate (15%) can be added to the new 15% is completely disingenuous. They are applied to entirely different income amounts (only one includes unrealised capital gains, for example).

It’s a bit like adding a player’s 100 runs in a cricket game to their 2 home runs in a game of baseball and saying they scored 102 runs in total. They’re both runs but no-one would ever consider adding them together because it’s meaningless.

The Government is absolutely within its rights to increase the taxes paid by the wealthiest superannuants. But it’s a shame the method that’s been chosen (which will – by default – include unrealised capital gains) is fundamentally flawed.

Meg Heffron is the Managing Director of Heffron SMSF Solutions, a sponsor of Firstlinks. This is general information only and it does not constitute any recommendation or advice. It does not consider any personal circumstances and is based on an understanding of relevant rules and legislation at the time of writing.