The proposed introduction of Division 296 represents one of the most significant changes to Australia’s superannuation system in more than a decade. While much of the public debate has focused on the headline measure – an additional 15 per cent tax on earnings for individuals with superannuation balances exceeding $3 million – the underlying mechanics of how those earnings are calculated are far more important from a planning perspective.

Two areas in particular have emerged as critical: the treatment of franking credits and the interaction between Division 296 and death benefit strategies, especially reversionary pensions. Both issues have meaningful implications for SMSFs and members with large balances, even where overall investment returns remain unchanged.

Franking Credits and the Division 296 Earnings Base

A central point of contention is how franking credits are treated when calculating Division 296 earnings. Under the revised draft legislation, fund earnings are effectively measured on a grossed-up basis. This means that dividends received from Australian companies are counted together with the attached franking credits as assessable income of the fund.

From a technical perspective, franking credits are not treated as tax already paid by the fund. Instead, they form part of assessable income, with the credit applied to offset tax payable. In some cases, particularly where a fund is in pension phase or has low taxable income, part or all of the franking credit may be refunded.

The issue arises because Division 296 applies an additional tax to the portion of a member’s earnings attributable to balances above $3 million, regardless of whether those earnings were actually retained within the fund after tax and refunds. Where a franking credit is included in earnings but not fully refunded, the calculation can overstate the economic growth of the member’s balance.

In practice, this means that two funds generating identical post-tax outcomes can face different Division 296 liabilities purely due to the structure of their income. Funds with higher exposure to Australian equities and franked dividends may be disproportionately affected, even where those dividends ultimately attract little or no net tax within the fund.

The revised approach reflects a deliberate design choice by Treasury. In moving away from taxing unrealised capital gains, the framework now relies more heavily on realised taxable income, including grossed-up dividends. While this is consistent with traditional tax principles, it creates outcomes that diverge from the original framing of Division 296 as a tax on the net increase in a member’s super balance.

Why This Matters for Portfolio Construction

For members with balances approaching or exceeding $3 million, the implications are structural rather than tactical. Division 296 does not change the tax base within the fund itself, but it does alter the effective tax rate applied to certain earnings at the member level.

This creates a clear divergence between investment returns and after-tax outcomes at the individual level. Asset allocation decisions that were previously neutral from a tax perspective may now produce materially different results under Division 296, even before considering broader issues such as liquidity, timing of income, and pension drawdowns.

Importantly, this is not about whether franking credits are taxed twice in a legal sense. Rather, it is about how the earnings base is defined and whether it accurately reflects the economic benefit ultimately retained within superannuation.

Division 296 and Death Benefits: A Less Visible Risk

While franking credits have attracted the most attention, the interaction between Division 296 and death benefits may prove even more significant over time.

Under earlier drafts of the legislation, an exemption applied in any financial year in which a member died before 30 June. That exemption has now been significantly narrowed. Under the revised legislation, the exemption applies only in the transitional year (2026–27). From 2027–28 onwards, a member’s superannuation interest remains subject to Division 296 for as long as that interest exists, including in the year of death.

This creates complexity where death benefits are not paid immediately, such as where assets must be realised, legal disputes arise, or estate administration is delayed. In these cases, Division 296 tax may continue to accrue after death, potentially leaving the legal personal representative liable for tax without direct access to fund assets.

Reversionary Pensions and Timing Risk

Reversionary pensions are a widely used strategy in retirement planning, allowing a pension to automatically continue to a surviving spouse upon death. Under the revised Division 296 framework, the timing of death within the financial year becomes critical.

In certain scenarios, both the deceased member and the surviving spouse may be assessed under Division 296 within the same year, based on their respective balances and earnings up to the point the interest ceases or transfers. While Treasury maintains that the legislation does not tax the same earnings twice, the allocation of earnings across different members within a single year can materially increase the overall tax payable purely due to timing.

This represents a significant departure from how many existing superannuation rules operate, including the transfer balance cap, which provides specific deferral and smoothing mechanisms following death.

Planning Considerations Going Forward

Division 296 fundamentally changes the way high-balance superannuation needs to be assessed. It introduces a new layer of member-level tax that interacts with fund earnings, asset allocation, pension structures, and estate planning.

Key considerations now extend beyond investment returns and include:

• how earnings are recognised and attributed within the fund

• the timing of income, realisations, and member events

• liquidity management for potential future tax liabilities

• the structure and documentation of death benefit strategies

While further regulations and guidance are expected, the direction of travel is clear. Division 296 is not a minor adjustment; it is a structural shift that requires deliberate, forward-looking planning.

At Cadre, we view this as an area where proactive strategy, careful modelling, and coordinated advice across tax, investment, and estate planning will be essential well before the rules formally commence.