In the face of ongoing criticism, Treasurer Jim Chalmers has finally confirmed major revisions to the proposed Division 296 tax, announcing the government will no longer apply the tax to unrealised capital gains on superannuation balances above $3 million. The announcement is a result of significant industry feedback and also reflects the delay in the government getting the legislation through Parliament. Whilst removal of the proposed unrealised profits tax is clearly welcome, the ongoing tinkering with superannuation rules continues to provide further uncertainty for retirees.

Division 296 was scheduled to commence with effect from 1 July 2025 and, despite the Federal election causing the legislation to lapse, the Treasurer reaffirmed his intention to have the law apply from 1 July 2025. Under the original plan, earnings on balances exceeding $3 million (this balance was not indexed) were to be taxed at 30 per cent. Importantly, and as a game changing play, this included unrealised gains. As such, tax could be paid on profits that would never actually be realised.

The revised proposal announced this morning, which is slated to commence with effect from 1 July 2026, still applies an additional tax, however, will now only apply to realised investment earnings on the portion of an individual’s total super balance above $3 million rather than the earnings as a whole. This is a seismic change and aligns the taxing point with well known and understood principles. In a bid to reclaim some of the lost tax revenue, the new announcement contains additional measures. Whilst the devil is in the detail (and there are no details available as yet), the Treasurer announced that a new 40 per cent tax rate will apply on earnings on balances exceeding $10 million. The thresholds on which the additional taxes are to apply are now anticipated to be indexed in line with the Transfer Balance Cap.

Whilst the Treasurer said the changes were designed to make the superannuation system “more equitable and sustainable”, while acknowledging the revisions would reduce the projected revenue from $6.2 billion to $2 billion over the forward estimates – largely due to the one-year delay, the changes reflect sense prevailing over what was an ill-conceived revenue grab.

Taxpayers with significant superannuation balances may still wish to review their circumstances before the new proposals are legislated to understand how it impacts them.

We will provide more details and guidance on the new proposal when they become available.

If you have any further questions, please reach out to your ESV Engagement team.