Division 296 tax and the CGT discount

The introduction of Division 296 has caused many investors with large superannuation balances to reconsider whether superannuation remains the best place to hold long-term investments. With balances above $3 million now subject to additional tax, some commentators have suggested that money should be withdrawn from superannuation and invested elsewhere.

However, one important factor is often overlooked: the capital gains tax (CGT) discount available within superannuation still provides a significant tax advantage, even for individuals affected by Division 296.

The SMSF CGT advantage

A complying SMSF generally pays tax at 15% on investment earnings. Where an asset has been held for more than 12 months, the fund can access a one-third CGT discount, resulting in an effective tax rate of only 10% on the capital gain.

For example:

• Purchase price: $1,000,000
• Sale price: $2,000,000
• Capital gain: $1,000,000

Without the discount, tax at 15% would be $150,000.

With the one-third CGT discount, the taxable gain is reduced to approximately $666,667, resulting in tax of about $100,000 and an effective rate of 10%.

Where members are in pension phase, earnings on assets supporting their pensions are tax-free. From the 2027 financial year, a member who has not previously commenced a pension may hold up to $2.1 million in pension phase, with no tax payable on the earnings.

For investors seeking long-term capital growth through property, Australian shares, international shares, ETFs and managed funds, this concession remains one of the most valuable features of the superannuation system.

What happens above $3 million?

Division 296 introduces an additional tax on earnings attributable to the portion of a member’s superannuation balance exceeding $3 million. Earnings attributable to that portion are effectively taxed at 30% rather than 15%.

Importantly, realised capital gains continue to receive the one-third CGT discount when calculating Division 296 earnings.

This means that for discounted capital gains attributable to balances above $3 million:

• Standard SMSF tax: 10%
• Division 296 additional tax: 10%
• Combined effective tax rate: 20%

Even with the additional tax, discounted capital gains are generally taxed at an effective rate of 20%, well below the 30% minimum rate for individuals from 1 July 2027.

Assets held on 30 June 2026 will also be eligible for a cost base reset, meaning Division 296 tax will apply only to increases in value from that date.

What about super balances above $10 million?

Division 296 introduces a second tax tier for balances above $10 million. The effective tax rate on earnings attributable to balances above this threshold increases to 40%. However, the one-third CGT discount continues to apply to eligible capital gains.

As a result, the effective tax rate on qualifying capital gains attributable to balances above $10 million is approximately 26.67%.

Although higher than the rates below the Division 296 thresholds, this rate may still compare favourably with other investment structures. Clients should seek professional advice to determine the most appropriate structure for their circumstances.

Growth assets may still belong in super

When considering whether to remove money from superannuation, investors should focus on the type of assets held.

For assets generating significant capital growth over long periods, such as:

• Commercial property
• Residential property
• Australian equities
• International equities
• ETFs and managed funds

the CGT discount available in superannuation remains highly valuable.

Although Division 296 may reduce the benefits of holding large superannuation balances, the underlying tax concessions remain. Where assets are expected to appreciate significantly over time, superannuation may still provide the most tax-effective investment structure.

The bottom line

Division 296 has undoubtedly changed the superannuation landscape. However, it has not eliminated the advantages of holding growth assets in super.

The one-third CGT discount remains available, resulting in effective tax rates of:

Trustees should therefore avoid making decisions based solely on the application of Division 296. Before withdrawing amounts from superannuation, careful consideration should be given to alternative ownership structures, the nature of the assets, estate planning objectives and anticipated investment returns. Notwithstanding the additional tax, superannuation may continue to be one of the most tax-effective structures for holding long-term growth assets. Trustees potentially affected by Division 296 should seek professional advice before changing their superannuation or investment strategies.

This article was authored by Natalie Scott, Superannuation Manager.