Meg on SMSFs: First glimpse of revised Division 296 tax

Agreed that it is a tax on wealth, that is, wealth that is being disguised as superannuation. The funds with huge balances don't meet the original intention for superannuation. The difficult issue is to determine what is an unreasonable superannuation balance?

@Mal, there's no such thing as "wealth that is being disguised as superannuation" because superannuation itself is merely a structure to hold one's assets (or part thereof).

It is indeed difficult to determine or define what is an unreasonable superannuation balance because what is unreasonable to one person may not necessarily be the case for other. Similarly, it is extremely subjective to state that "the funds with huge balances don't meet the original intention for superannuation" when the person making such statements cannot even define what constitutes "huge balances" or "the original intention of superannuation".

Given the caps on adding to your super and the transfer balance cap moving into pension phase I think a fairer approach would have been to limit Div 296 to accumulation phase balances only.

Well, as a free country (supposedly, at least), individuals should have the freedom to accumulate wealth whether it is in their super or not. Your suggestion that someone has to spend their superannuation by a certain age is rather absurd - many people invest their hard-earned cash not just for themselves, but for their children and grandchildren too.

Our share of tax is a legal matter, not a moral issue - I would agree with your statement that "tax is collected to provide community resources" only if there's evidence that the amount of tax collected by the government directly translates to a better public service (both in quality and quantity), but if we are being honest here, such evidence is nonexistent. If anything, the higher tax generally leads to a bigger government coffer which ends up in the hands of the politicians (and their family members) anyway - consider the amount of money spent by Anika Wells on her "work travel", for example.

Meg - you have been all over this since Day 1 where most others are only just catching up so thank you. I would make three points:

1. This is not a "Tax on Super" it is a "Wealth Tax" that "uses" TSB to see if you are caught ie deemed Wealthy!
2. You say "...no longer includes taxing unrealised capital gains...." but it still does, at least partially. TSB includes unrealized gains - as TSB grows, so does the "proportion" over $3m or $10m and therefore the tax impost.
3. The key variable now is Income which, in a SMSF, you at least have some control as to when Gains are realised or deferred. A portfolio focussed on Capital Growth worth a thought

At the end of the day, it is a question of paying tax due under 296 or pulling out "excess" funds and paying tax elsewhere, or upgrading principal place of residence, or kids, or grandkids etc

Thanks Rob - and your point (2) is particularly valid, I'd not really thought of that. I can definitely see some unintended (or maybe intended) consequences here. For example, imagine someone normally had a super balance of around $3m but a crazy set of circumstances meant one asset jumped enormously (taking their balance up to $5m) and then dropped again. If 30 June 2028 happened in the middle, their brief moment at $5m would penalise them in both 2027/28 and 2028/29. At least - IMO - this is better than the previous draft!

Meg - personal view, it is "intended" and intentionally blurred from view! Headlines - "296 no longer taxes unrealised gains, we have listened..." Everyone breathes a sigh of relief...But!

As long as TSB controls the formula, unrealised gains are captured in the calculation. The impact is certainly less than "296 Version 1" but it is not Zero. If for example income including realised gains was $250k in year 1 and exactly the same in Years 2 and 3, But TSB grew by 20% in each year due to unrealised gains, the "proportion >$3m" pops as does the tax.

The task for anyone impacted and I am, is to model a range of scenarios, compare them with other tax structures and, if necessary, take action prior to 30/6/27.

As the value of assets grows so does the income therefrom (usually), so in a sense they are still taxing the unrealized value of the asset. The new tax seems now to be taxing the income of the fund.

NSW state land tax is also a wealth tax that includes tax on unrealised capital gains. So taxing unrealised capital gains is not unprecedented. In NSW the land tax threshold is no longer indexed. Just saying.

I have images of uncle Scrooge in the basement, throwing his money up and down, whilst scheming how to avoid contributing to the society that made him rich.
$13M in super? Cry me a river.
This is not an extra tax. It’s the withdrawing of a tax concession that is there to help people fund retirement. $13M in super? Mission accomplished. Retirement has been well and truly funded.

Not the "withdrawing of a tax concession" but the partial withdrawal of that tax concession, Harry. And the removal of unrealised gains from the earnings allows the worst of the tax-dodging misuse of super to continue. Indeed, to read some of the comments here and elsewhere, it's likely to encourage people seeking to leave large tax-advantaged savings to their kids to increase their reliance on growth assets over income.

Of course, at the same time, they'll complain about the "inequity" of taxing super in the hands of beneficiaries...

Thanks for this update. It all seems ridiculously complicated, as it has from when it was first announced.

To date, super funds pay all the tax on fund earnings at the fund level, because the super fund owns the assets that earns the taxable income. Each member’s share of that tax is never calculated, This new tax is a personal tax based on an individual’s share of the super fund’s earnings where their personal balance is over $3 million. In an industry fund where there are thousands of members, joining and leaving on a daily basis, with multiple investment options in the fund that members can also change on a daily basis, it is impossible to calculate a person’s share of the fund’s income and capital gains.

That’s why the first iteration of this tax was based on unrealised gains - to appease industry funds. The only way an industry fund could work out a member’s tax obligation was to simply look at the increase in the member’s super balance over time based on the growth in unit prices (which automatically includes unrealised gains). But for SMSFs, including unrealised gains meant a tax on income that hadn’t yet arrived and relied on a professional opinion about the market value of an asset that hadn’t yet been sold. It was a tax based on “an opinion”.

In response to the political flak, the new tax will now only include realised gains and that makes life much simpler for SMSFs to work out each member’s share of the fund’s tax obligation. This new tax doesn’t apply until the asset is actually sold and that maybe never. But for industry funds, the problem of calculating each member’s share of the fund’s income and realised gains, remains. The draft legislation says that these funds will do that calculation in a “fair and reasonable manner”, but offers no clue as how that will work. Clearly, this new tax will be a tax on “a best guess”.

Div 296 is not a tax on super funds - it’s an individual tax liability - but it’s a tax based on the growth in assets that I do not own! I do not own the assets in my super fund held in a trust on my behalf. So how can the member be held responsible for the tax on these assets. This absurd situation only arises because the government is determined to make one taxpayer, the member, responsible for the tax obligations of another taxpayer, the super fund.

Meg this is excellent analysis and as Rob has stated, you have been on top of all of this since the start - thank you.

In relation to Capital Gains, if the fund sold an asset during the year and realised a gain, am I correct in interpreting this to mean that the fund will still be assessed for CGT under the current CGT laws applying to a fund PLUS the tax assessed under Div 296 and that both amounts are payable?

Thanks Meg - an excellent article.
One question if I may. Above you say: super earnings relating to the proportion over $10 million. This means some people will pay an extra 25% (15% + 10%) tax on some of their super earnings.
In your example above the income relating to the proportion over $10M is $222,660 which you have taxed at 10% = $22,266 tax to pay. Shouldn't the $222,660 be taxed at 25% - therefore tax payable would be $55,665 (an extra $33,399 in tax payable) ? Unless I have misunderstood your calculations ? Thank you.

"A portfolio focussed on Capital Growth worth a thought"

That can become a bit problematic when you are in pension mode and required to discharge the minimum pension requirement every year.

James, I think you will find that the $222,660 has already been included in the first component (i.e. amounts > $3m) and accordingly taxed at the rate applicable to that threshold (15%)

Hi James - that tricked me at first too! But actually if you think about it, that $222,660 is ALSO included in the $696,780 (the amount over $3m). So it's already been caught at 15% in part [A] above, we only need to add on 10% for part [B] to get to the total of 25%. Does that make sense?

Kerrod - thanks for your kind words, although I have to admit ... I do get paid to nerd out on this tax and it's ilk.
In terms of your question on capital gains : yes tax will be paid twice on that gain. Once by the fund (15% on the discounted amount) and another time by Division 296 tax to the extent that the members of the fund are impacted by that tax. So if only one member was impacted and they had 70% of the fund, the likely outcome would be their Division 296 tax would be based on only 70% of that discounted gain. As to exactly how much Division 296 tax they'd pay, it would depend on the size of their balance. If the relevant balance was $4m it would be:
15% (the tax rate) x 25% (the proportion over $3m) x earnings
If we're looking at just this particular capital gain, earnings = 70% (their share) x the discounted capital gain.
The reason I'm laying out all the numbers is that as you can see if the gain is $150,000 (or $100,000 after discounting), the super fund might pay 15% on the full $100,000 but the Div 296 tax will be much less.

If they are both in pension phase, why would the fund pay tax of $180,000 in "the usual way"? Shouldn't that be no tax at all?

In regard to both the question from Harry and the question from Peter, due to the Transfer Balance Cap not all of the assets of the (hypothetical) fund are in tax free pension phase. It is also the reason the fund is paying normal superannuation tax on part of the investment income.

Oh, thanks for that clarification. Maybe it should have been postscripted to the tabulation.

That is where people get confused and why u should consider this as a " wealth tax", not a Super Tax. Your tax liability in Pens Mode or Acc mode, simply does not change. 296 has nothing to do with Super per se other than using your Super balance to determine whether you are in or out.

The "problem" is that all the commentary seems to assume you are in Accum Mode and the start point is already 15%. There will be people in Pens Mode where the start point is Zero and the 296 liability will be much less..

There is no excepted income for calculating Div 296 earnings. Hence 296 liabilities will be same whether the members are in Acc or Pens mode in any combination.

So it seems if your TSB>$3m, income from super in pension mode, which is nominally "tax free", will actually be subject to some tax under Div 296.

Meg, thank you for the detailed update.
Are you able to comment on the planned treatment of defined benefit pensions. How will they be assessed as a contribution to an individual's total super assets?

That would be a whole other article Ian and there are some important regulations I wouldn't mind seeing first.

I'm struggling to envisage how the valuation of a defined benefit pension can change without it having an effect on both the recipient's capital and the Government's budget. With the current system, if a person on retired at 55 with a $50,000 PSS pension, this would be valued at $800,000 (16x). A family law valuation could be higher, say $1m, reflecting the age of the retiree. Although the Government's portion is unfunded, to the pensioner this is real money. At retirement, the recipient can elect to take a portion in cash or rollover some of the balance to another scheme. How does a valuation change for tax and family law purposes without the capital itself changing? It will also be interesting to see whether the Government decides to apply the new formula to existing pensioners, retrospectively. If the change has real consequences, recipients of the pension who locked in their choices upon retirement have no flexibility to alter their decision to take account of the new regulations.

To stop people who want to "extract a lot of superannuation because they have no intention of ever paying this tax"), a more equitable solution instead of the "higher of two balances" would have been to add back such withdrawals to the closing balance for the purpose of calculating the tax. Under the "higher of two balances" calculations, members with accounts whose balances have dropped through market forces outside their control are being unfairly penalised by using the start-of-the-year balance.

Exactly Peter - something we've been mulling over internally, particularly given the Shield and First Guardian cases illustrate exactly the case where this would be incredibly rough.

Meg. Are you also able to please comment on the mechanism for indexation of the thresholds as this does not seem to be covered but was one of the highlighted issues with the original proposals.
Overall, this is an overly complicated mess that wastes more resources on accounting and super fund fees. I thought Jim Chalmers had a goal to fix productivity and overly onerous legislation in Australia!

Yes David - both the $3m and $10m thresholds are indexed in line with inflation and in fixed increments ($150,000 for the $3m threshold and $500,000 for the $10m threshold). That means once we've had enough inflation to take $3m just above $3,150,000 it will be indexed to that amount.

Meg, thanks for an excellent article.

The wording of Section 1.35 of the Explanatory Memorandum (justifying the use of the greater of the TSB values at the end or just before the start of the year) strikes me as rather odd: "This approach acts as an integrity measure to ensure the liability for Division 296 tax cannot be avoided by reducing the TSB prior to the end of the income year".

For a start, it doesn't "ensure" that the tax liability can't be avoided, it just means the tax can't be less than whatever is calculated using the TSB just before the start of the year.

More worrying though: since when does withdrawing money from super lack integrity?

Thanks Meg for the great article,

Jim, my sentiments exactly re withdrawal of funds lacking integrity, also the use of the “higher “ of the value for TSB values at the end or just before the start of the year for Div 296 calculations proves that this is and always was a “wealth tax” . I note that prior to the recent proposed changes a lot of commentary was about people “hoarding” funds in super, now it looks like if one was to withdraw funds prior to end of financial year they will still be wacked with this wealth tax.

Has anyone read the article in the Fin Review of 9 Jan 2026, "Are franking credits taxed twice under the Division 296 super tax?" - see https://www.afr.com/wealth/superannuation/are-franking-credits-taxed-twice-under-the-division-296-super-tax-20260108-p5nsmj It would appear that under the Div 296 tax, dividends and franking credits are still grossed up but no credit it given for the franking credit, which is either a design failure or an attempt to slowly phase out franking credits. Either way, it should be nipped in the bud before the legislation gets finalised!!!

Peter, I read that article and I believe it is incorrect. It argues that Div 296 should not be applied to the fully franked dividend plus franking credit, because it is “an effective tax on tax”. By a “tax on tax”, the article implies that the franking credit component, which represents the tax withheld by the company on profits, is being taxed again via Div 296. It is not. The franking credit does not represent tax paid as far as the SMSF is concerned, rather it is income received by the SMSF (withheld when the dividend was paid), and like all other income, it should be taxed. That is 15% is applied to it for the portion of earnings under $3m, with a proportion of 15% applying to it if the TSB exceeds $3m.

The article claims (via an accountant at TAG) that Div 296 should only apply to the franked dividend and not the franking credit because it thinks the franking credit is tax paid and is being taxed again, except that in the hands of investors or indeed SMSFs, it is actually income. So I don’t believe the article is right.

Looking at the numbers in an example in the article.

An SMSF with a balance of $3.4m will attract Div 296 tax on income at the rate of 11.7% x 15%. Correct, as $m(3.4 - 3.0)/3.4 = 11.7% (rounded).

$120,000 in fully franked divs gross up to $171,429 such that the franking credit is $51,429. Correct.

The additional Div 296 tax on the franking credit of $51,429 is about $900. Correct, as 11.7% x 15% x $51,429 = $902.58. And the Div 296 tax on the total grossed up dividend will be 11.7% x 15% x $171,429 = $3,009

Meanwhile, the non-Div 296 tax on the grossed up franking credit will be 15% x $171,429 = $25,714.

So that the overall tax liability in respect of the fully franked dividend will be $3,009 + $25,714 - $51,429 (the franking credit) = -$22,706.

That is, the fund receives a tax refund of $22,706. But the article argues that the refund should be $22,705 + $902 equals $23,607 because the franking credit shouldn’t be subject to Div 296. That’s wrong. The income is the income, and the franking credit is income. The non-Div 296 and Div 296 components should be applied to the same income amounts. You don’t reduce the income for the Div 296 calc.

And the fund has still received the benefit of the franking credit in full as it should (that is, the withheld amount is returned in full). There is no “tax on tax”, and the article goes on to say that TAG has made a submission ahead of a consultation deadline, to exclude the franking credit from the fund’s income for Div 296 purposes. It should withdraw that submission.

Meg,
Do you agree with Tony's interpretation or is TAG on the right track?

Bill, just to help you a bit more with this.

Imagine a company declares a fully franked dividend of $70. Because the co. has already paid $30 co. tax on profits out of which the dividend was paid, the dividend has a $30 franking credit attached. The gross dividend is $100. An SMSF receives the $70, the co. has already sent $30 off to the ATO.

When the dividend was paid, responsibility for the final taxation on the gross dividend transfers to the SMSF. So for tax purposes, the SMSF now has $100 in assessable income, with $30 tax already paid. The final tax position on the $100 is now out of the company’s hands to be assessed at the SMSF’s tax rate. The co.’s role ended when it paid the $30 as co. tax and the corresponding franking credit became SMSF income.

Assume there is no Div 296 tax. The SMSF tax rate is 15%. The SMSF now has a $15 tax liability in respect of the dividend, but $30 has already been paid, so it gets $15 back.

Now assume the SMSF tax rate doubles to 30%. The SMSF now has a $30 tax liability in respect of the dividend, but $30 has already been paid, so nothing more happens, the tax position is settled.

Has double taxation occurred because the SMSF tax rate doubled? No. The SMSF income hasn’t changed either, it was still $100. All that changed was the tax owed by the SMSF because the tax rate doubled. Just because it has paid $15 more in tax, doesn’t mean it has been taxed twice. No, it has paid tax once at double the rate.

So how would things be any different under Div 296? They wouldn’t. Yes, the overall tax rate increases if the TSB is greater than $3m. The effective rate will be somewhere between 15% and 30%, but again that doesn’t mean that the SMSF is paying a ‘tax on tax’. Just that the rate at which it must pay tax once on the gross dividend has increased.

I think the confusion arises because Div 296 is an overlay tax on the standard 15% SMSF tax rate. But it just works out to be an increase in the overall effective rate, no different to if there was no Div 296, yet the standard 15% rate increased.

In the hands of the SMSF, the franking credit is assessable income, it is not yet tax paid by the SMSF. Under Div 296 or not, It pays tax on the gross dividend once at either 15% or an effective higher rate if the TSB is > $3m. There is no ‘tax on tax’. Hope this helps.

By the way, in the SMSF’s eyes, there is nothing magical about the co. tax rate of 30% at which the franking credit arises and is ultimately income in the SMSF. What is relevant to the SMSF is its tax rate. If the co. tax rate for example, was something other than 30%, the overall SMSF tax liability doesn’t change. It still pays tax at its rate on $100 gross. And whether its tax rate is 15% or something else, it only pays tax on the gross dividend, not ‘tax on tax’.

Bill, TAG have now made the following statement on their website, on the treatment of franking credits under Div 296:

"Having tested this issue through submissions and direct engagement, TAG has accepted Treasury’s position that the outcome is consistent with the policy intent."

I can't believe that this article has got so much attention. Such HNW folk with high (massive) amounts in super are pretty rare. Can I conclude a lot of Firstlinks correspondents are HNW ???. Another article this week by Tim Farrelly forecasts in 2026 that bonds will outperform gold. Seems a dearth of gold holders in Firstlinks to query this. As a gold bug ,happy to make over 50 % increase in funds last year, but sadly not even close to $3 million. Also wondering why these HNW folk with huge funds in super aren't taking some monet out and putting it in a trust environment.

Most helpful article Meg.
I used to advise on SMSFs. Am glad I retired and no longer do so ... all got too bloody complicated !!!

Is it just to simplify the calculation or is there something about pensions I don’t understand, but a $200k pension on a $20m fund is just 1%, I thought the pension phase limits would require a minimum of 4%?

I have been wondering the same but ignored it as my main concern was about the tax of $180,000 shown as payable in the table (before the Div 296 tax calculation) when there should be none as both members are in pension phase. Or do the $180,000 tax paid relate to the previous year when, possibly, the members were not yet in pension? If so, that should have been explained to avoid confusion.

Harry, perhaps there are pro-rata pensions if the members entered into pension phase part-way through the year only. If that is so, it ought to have been explained as it is totally confusing ( as is the $180,000 tax calculation) and undermines the veracity of the whole article.

The compulsory 4% (or more) applies only to the Pension account which was set at 1.6 million (under PM Turnbull). The rest of Tim’s super fund is in an “accumulation “ account.
Tim must withdraw 4% of 1.6 million = $64,000 as a pension.
Anything extra is taken as lump sums from his accumulation account(s) if he wants to.
The pension account cap has grown a little over the last seven years (income earned) but that is the part that is tax free and that is the account where the compulsory pension must come from

Not quite true. While the transfer was limited to $1.6m ($2m today), the funds in pension phase were permitted to grow to any value. I went into pension phase with a $1.7m cap, but I’ve grown it to just over $3m, which before Div 296 would have meant it remained untaxed.

Sorry Harry I should have clarified : in both cases, the member have way more in super than they would be allowed to have in a pension (in most cases). So I assumed that each member had $2m in pension phase and drew the minimum for someone aged 65-75 (5%) - ie, $100,000 each. The rest of their super would be in accumulation phase and hence the fund would still be paying tax. Of course, if its income was coming in the form of franked dividends rather than interest, it would still be receiving a refund in the fund (thanks to those franking credits) but not a full refund of ALL the franking credits as their accumulation balances give rise to taxable income.

With all due respect, I must say the example the author uses ( balance of 12m and 8m ) is unrealistic and far from reality. Because the assumes people of such high super balances are still not having their super in pension phase, my understanding is that only less than 2 percent of the population have super balance over $3m, it is very odd and silly to not to commute your SMSF into a pension if your earning income out of your fund is more than $200k, you simply pay $60k extra tax for no reason in this instance.

Hi James - normally I wouldn't use such large amounts in my examples because you're entirely right - only a small proportion of the population is impacted by this tax and in fact most people impacted have less than $10m. But since this is a tax that very deliberately targets people with large balances I wanted to use figures that would illustrate all aspects of it, including the impact on someone with over $10m.

I've assumed both members do, in fact, have pensions (you're quite right - people impacted by this are most often over 65 and most people over 65 start pensions). An important point, however, is that even at 65 they couldn't turn all of their super into a pension as it would exceed their transfer balance cap. As others have pointed out, this limits the amount they can put into a pension when it first starts and the limit will depend on when their pension started ($1.6m back in 2017 or $2m today). In my examples, I've assumed they have $2m in a pension which feels reasonable to me - it's either the amount they could put into a pension if they were starting their first one now OR it might be the amount the pension they started in (say) 2023 with $1.9m has grown to today. It also kept the numbers nice and simple :) The rest of their balances would be in accumulation phase - still contributing to the fund's tax bill (or reduced franking credit refund)

It should also be noted that the “indexation” is in lumps of $500,000, so the $3m limit will stay round for around 5 years given current inflation rates, rather than climbing $100k for each of those years.

Hi Harry - the indexation is in lumps of $500,000 for the $10m threshold but $150,000 for the $3m threshold. So it would take around 2 years at 3% to get there in both cases.

How on earth will this work where a member dies during the year? In version one, a member was exempted if they died during the year (unless they died on June 30). Looks as though this exemption has been removed in the revised version. That said, a transitional rule is proposed to apply so that if a member dies on or before June 30, 2027, an exemption will apply for 2026/27 only. What happens if a member dies on July 1, 2027 (who is in the remit of Division 296 for 2027/28), and they have no money in super (and their estate has been distributed) when the Division 296 assessment is issued? Got me also thinking about what currently happens with deceased member’s in this situation who have Division 293 and/or excess contribution assessments for the year im which they die.

Fuzzybear - all good questions and things we'll be exploring during the consultation period! You're right, there has been a change for deceased members between Version 1 and Version 2 of this tax. Previously they were excluded and now they'll be caught from 2027/28 onwards.

Death will raise all sorts of interesting questions and not just for the deceased's estate. It's also a time when very large capital gains are often realised (triggering large Div 296 earnings) - in your example of a member dying on 1 July 2027, imagine the situation where the super is partly paid as a pension to the surviving spouse (who then suddenly has a balance > $3m for the first time) and partly paid out as a lump sum (requiring asset sales). People who've never been in the Division 296 tax net before would suddenly be caught.

Hi Meg, I ask clarification on the definition of "earnings". Are earnings Assessable Income or Taxable Income?
I ask this for Taxable Income would exclude exempt income (earnings) from the Pension Account.
If say one has a large capital gains liability in the Pension Account and one chooses to use the segregation method so no capital gains tax liability arises then is the capital gains also not counted for Div 296 purposes?

Paul, the starting point for "earnings" is taxable income but it's adjusted to remove contributions and add back exempt income for pension funds. So a fund that - say - normally only pays tax on 40% of its investment income because 40% of the fund is in pension phase will still only have 40% counted for the fund's actual tax bill but ALL of it (adding back the exempt 60%) for Division 296. Re your comments on the segregated method, don't forget that funds with at least one pension member who had > $1.6m at the previous 30 June can't use the segregated method if they have a mix of accumulation and pension accounts - so most Division 296 tax people wouldn't be able to use this approach in any case. Even if they could, the law is smart enough to catch it :)

To Meg Heffron. Re your paragraph commentary posted 10 January, re "a fund that only pays tax on 40% of its investment income because 40% of the fund is in pension phase " - should it not read "because 60% of the fund is in pension phase" ?
And thanks for the detailed article.

Oops - Owen is right. In the example above I should have said "normally only pays tax on 40% of its investment income because 60% of the fund is in pension phase". Thanks Owen.

Hi Meg, to reword my question and to simplify, lets assume we have a SMSF with only a Pension Account. This pension account due to good fortune has a balance greater than $3m due to capital gains. Will earnings be classified as Taxable or Assessable income for Div 296 purposes even though the Pension Account is tax exempt?

Paul,
Div 296 has nothing to do with the tax paid in accumulation or the tax-free pension mode. It is a personal tax liability paid by a member of the fund based on that member’s share of the fund’s earnings when their total super balance exceeds $3 million.
Their total super balance is their pension and accumulation accounts combined. The tax is an additional 15% tax based on the proportion of their super balance over $3million. If their final balance was $3.3 million, the addition tax would apply to 10% of their share of the fund’s earnings. It is a personal tax liability but they can ask their super fund to pay it.

In the above examples, if the earnings above $3 million/$10 million include grossed-up dividends (i.e. franked dividends) where in the 15% and 10% Division 296 calculations is the offset for the franking credits attached to and grossed up with the dividends included in the earnings above $3 million and $10 million?

Hi Peter - the "earnings" for Division 296 tax is basically all the investment income on the fund's tax return. Since franking credits are considered "income" for that purpose, they're taxed under Division 296. You get the franking credit back in the fund's tax return but not again in Div 296.

TBH this feels logical to me but I realise others disagree.

You could look at it like this : the company earns $100 profit on which it pays $30 tax. This comes to the super fund as $70 cash + $30 franking credit.

For the slice of super between $3m - $10m, the Government talks about a headline rate of 30% (ie 15% super tax plus 15% Division 296).

In other words, it wants to end up with $30 from this $100 rather than the $15 it's getting at the moment. (Because at the moment, it's collected $30 from the company in the first place but then has to refund $15 to the super fund. The super fund's tax bill is 15% x $100 less the $30 franking credit.) Collecting another $15 via Division 296 tax (15% x $100 including the franking credit) does the trick.

I realise this is not how the calculation works - I've completely ignored the proportion - but conceptually this is the logic if you imagine we're only talking about the tax paid on the slice of super between $3m and $10m.

Meg, franking credits are additional income to every taxpayer, not just super funds. The problem is, we never see this income because it is sent to the ATO first. How much of that income we get to keep depends on how much the ATO withholds as it processes our tax return and that depends on our personal marginal tax rate.
Anyone who does their own tax return knows that franking credits are additional taxable income, but they are also tax credits available to pay the tax on that higher taxable income.
In the case of Div 296, it will be calculated on the increase of the fund’s taxable income, not just the part that appeared in the bank account. So it’s not a tax on a tax - it’s a tax on the your share of the fund’s taxable income over a 12 month period.

Well explained. Yes, it does make sense.

I gave up pretty quickly when I saw the calculations were for a couple with $20M in super. How they and their accountants get around this most people don't care, and I think this is actually slightly unhelpful in that it perpetuates a misconception that people with SMSF's are uber wealthy and gaming the system. There would be just a handful of people in this category I expect.

Another sting in the tale (pardon the pun) is the indexation (CPI) of the thresholds. This would be, say 2.5%. Superfunds generally return on average around 7% per annum. Thus over time, the threshold will be increasing by 2.5% per annum and the fund would be increasing in value by 7% per annum. This will progressively capture more members into the Div 296 tax regime.

I have altered my smsf holdings (for a not inconsiderable cost and damage to established compounding) from mainly growth to mainly income in an attempt to prepare for the aggressively touted div.296 mark 1.
It now looks like a reversal of this manoeuvre may be on the cards to help keep a lid on the further contribution I make to the government trough via mark 2.
Perpetual rule changes are wealth destroying whereas changes of governing political party on the contrary, seems to limit the damage somewhat.

If Tim has $12M and Sonia has $8M and if they are drawing a pension the minimum rate would be 4%.Therefore their pensions would be Tim $480K and Sonia $320K, not $100K each. Am I missing something here?

. During the financial year, their super fund received income (rent on various properties and interest) of $1.5 million, and the properties grew in value by $1 million (but no properties were sold – no capital gains were realised during that financial year). Let’s say they drew pensions of $100,000 each ($200,000 in total).