Under the proposed Division 296 tax, ‘superannuation earnings’ are calculated based on the annual change in an individual’s TSB across all of their super funds, with adjustments made by adding back any withdrawals and subtracting any contributions during the year. This approach captures both realised and unrealised investment gains, meaning even paper profits are included, not just actual income received. Conversely, both realised and unrealised investment losses will also be included, reducing the amount of the earnings. The calculated earnings are then apportioned so that only the amount corresponding to the portion of the individual’s TSB above $3 million is taxed at 15 per cent.

Using this approach, Carlos’s superannuation earnings for Division 296 purposes is calculated as follows:

• Closing TSB at 30 June 2026 of $8.85 million

• Less prior year TSB at 30 June 2025, being $9 million

• Add withdrawals made during the 2025–26 year of $150,000

This results in Division 296 superannuation earnings of Nil.

Consequently, despite his balance being well over the $3 million mark, Carlos has no Division 296 tax liability in respect of the 2025–26 financial year. That’s because his ‘superannuation earnings’ as defined under the legislation are zero for the year, owing to an effective unrealised loss in his investment holdings. Therefore, there is no income base on which to apply the extra 15 per cent tax.

Does this align with policy intent?

The stated objective of Division 296 is to reduce the concessional tax treatment on superannuation earnings for high-balance members. Yet, Carlos enjoys the full 15 per cent concessional tax rate on his actual share of fund taxable income, that is, $600,000 -there has been no reduction to the superannuation tax concessions to the taxable net earnings applicable to that portion of his TSB in excess of $3 million. This is because the additional Division 296 tax, the tax to reduce his tax concessions, isn’t triggered unless there are positive superannuation earnings under the statutory definition.

This outcome raises several questions:

• Should someone with $9 million in superannuation continue to benefit from the full tax concessions, simply because of unrealised investment losses?

• Is the policy achieving its stated aim, or does the calculation method create loopholes?

• Could this incentivise strategies to manage the timing of asset revaluations or withdrawals to minimise Division 296 exposure?

These questions highlight the potential for unintended consequences and inconsistency with the underlying principle: to ensure that those with significantly higher superannuation wealth receive less tax concessions.

The mechanics undermining the message

The calculation of superannuation earnings under Division 296 uses a formula that:

• Includes both realised and unrealised gains and losses.

• Adds back withdrawals.

• Excludes contributions.

• Applies a proportion of the individual’s TSB that exceeds $3 million to determine the amount subject to tax.

If the earnings figure is zero or negative, even a very wealthy individual with a significant portion of their balance above $3 million may not have the tax concessions pared back on their share of fund taxable net earnings allocated to their superannuation interest(s).

In Carlos’ case, the $150,000 withdrawal is added back to his closing balance of $8.85 million, effectively returning him to his $9 million starting point. The resulting superannuation earnings calculation is nil. With no positive earnings to apportion, the Division 296 mechanism falls away, despite Carlos still enjoying the benefit of a substantial concessional tax rate on any fund taxable income allocated to his interest.

Implications and takeaways

The Carlos example spotlights a key inconsistency in the policy:

• Carlos enjoys the full benefit of tax concessions on a very large super balance

• Division 296 fails to impose tax, not because he isn’t wealthy, but because the earnings calculation is zero

This loophole could be exploited, intentionally or otherwise, by those able to manage valuations or investment timing, creating disparities between taxpayers with similar balances but differing short-term investment outcomes.

In contrast to cases like Jess, Why Division 296 Tax Is Not Just a 30 per cent Tax: Breaking Down the Math Misconception where unrealised gains dramatically inflate the Division 296 tax liability (resulting in effective tax rates exceeding 50 per cent when aligned to taxable income), Carlos is entirely exempt from the Division 296 tax for 2025–26, despite having a TSB well over $3 million and more than double Jess’.

A Call for Refinement

If the objective is to genuinely reduce the concessional treatment of high-balance superannuation accounts, then basing Division 296 on a broader and more consistent measure of income, or anchoring it to actual taxable income, might better serve that goal.

As it stands, the design of Division 296 creates inequity by taxing not just earnings, but paper gains, while allowing large balances to escape tax altogether when investment performance slips.

The Carlos conundrum and the case of Jess are not just extreme cases. They are both signals that the Division 296 framework needs a second look.