Division 296 Tax & Implications for Personal Injury and Other Compensation Payments in Superannuation

Off the back of the Federal Budget and the report recently handed down by the Senate Economics Committee, there has been much debate within the superannuation industry surrounding the Bill containing the measure to impose an additional tax on superannuation balances above $3 million.  It’s often referred to as Division 296 tax, as the bill proposes to include the new Division 296 in the Income Tax Assessment Act 1997 (Cth).

This article will highlight how this proposed legislation will impact individuals who have received structured settlements and have contributed this into superannuation or those who have received a successful Total Permanent Disability (TPD) claim via their Superannuation Fund.

The Division 296 legislation, which is proposed to take effect from 1 July 2025, aims to reduce the tax concessions available to individuals with substantial superannuation savings – specifically, those with a Total Superannuation Balance (TSB) exceeding $3 million. The intention is to ensure a more equitable distribution of tax benefits within the superannuation system.

Until recently, the $3 million threshold was not due to be indexed.  Having no indexation meant that over time, as superannuation balances grew due to investment returns and contributions, more individuals would find themselves subject to this tax.  However, an amendment to introduce indexation to the $3 million cap was moved by the House of Representatives on 15 May.

Division 296 tax can be calculated in 3 steps:

1. Determine the increase in the TSB of the individual during the financial year. This increase will be treated as the total earnings of the individual for the financial year for the purposes of Division 296.  The earnings are adjusted for any withdrawals, pension payments, and contributions made during the year.
2. Determine the amount of total earnings which is attributable to the portion of TSB in excess of $3m.
3. Apply the 15% tax rate to the amount of total earnings attributable to the TSB in excess of $3m.

It’s important to note that any losses can be carried forward to offset future earnings, providing some relief in fluctuating market conditions.

Division 296 tax is a personal tax, meaning the individual, not their super fund, are liable. However, individuals can opt to pay this tax from their superannuation if they choose.

The calculation of the tax can be best illustrated through the following example.

Alice has a TSB as at 30 June 2025 of $3.5m and a TSB of $4.1m at 30 June 2026.  Additionally, she made $110,000 of non-concessional contributions to her super fund and withdrew $250,000 as benefit payments.

1. Determine Alice’s Division 296 “earnings” over the financial year.

The taxable increase in the TSB for Alice for the year ended 30 June 2026 will be:

$4.1 m – $3.5m + $250,000 – $110,000 = $740,000

That is the TSB at the end of the year minus the TSB at the beginning of the year. Additionally, benefit payments are included, and non-concessional contributions are excluded.

• Amount of Division 296 earnings attributable to excess TSB

For this purpose, excess TSB refers to the amount of TSB at the end of the year that exceeds $3 million.

The Division 296 earnings attributable to the excess TSB are calculated based on the proportion of the TSB at the end of the year that exceeds $3 million. For instance, if 10% of the TSB at year’s end exceeds $3 million, then 10% of the Division 296 earnings would be taxable.

Back to Alice.  As at 30 June 2026, the excess portion of Alice’s TSB is $1.1m (ie $4.1m – $3m).  The proportion of Alice’s Division 296 earnings attributable to the excess portion will be 27% (i.e. $1.1m /$4.1m).

Consequently, the taxable portion of Alice’s Division 296 earnings will be one third of $740,000 which is equal to $199,000 (rounded down to the nearest $1,000).

• Calculate Division 296 tax.

The tax will be 15% of Division 296 earnings attributable to the excess TSB.  In Alice’s case the Division 296 Tax will be:  15% of $199,000 = $29,850.

Individuals who receive a structured settlement and choose to make a personal injury contribution into superannuation are exempt from Division 296 tax.

This is because these contributions are designed to support individuals who have sustained significant injuries and need long-term financial support.

The tax exemption ensures that these individuals are not further burdened by the additional tax on their superannuation earnings, recognising their unique circumstances and financial needs.

Individuals who have been approved to receive TPD insurance proceeds may be impacted by Division 296.  TPD proceeds are excluded from calculation of the adjusted total super balance in the first year of receipt.  However, where the proceeds are retained in the super fund in subsequent years, the amount will be subject to tax, including any unrealised gains made from those payments.

The reasoning behind this treatment is to ensure that while the immediate financial support is tax-exempt, any long-term growth on these proceeds within the superannuation system is treated like other superannuation earnings.

It may be beneficial for some individuals in this scenario to withdraw their TPD proceeds from super in the year they are received, in order to avoid being caught up by the Division 296 rules.

Some clients might consider moving funds out of superannuation to avoid Division 296 tax. However, this decision should not be made lightly.

Superannuation remains a tax-effective investment vehicle even with the Division 296 tax. The concessional tax rates within super may still be more favorable compared to other investment structures over the long term.  Additionally, moving assets from super may trigger significant capitals gains tax and other selling costs.

Clients should also consider that they cannot withdraw funds from their superannuation solely to avoid this tax unless they meet specific conditions of release, such as retirement, being permanently incapacitated, or turning 65.

Generally, individuals that are likely to be impacted by this legislation should not act hastily.  It will be important for them to seek professional advice and conduct detailed financial modelling to make an objective decision based on their specific circumstances.  They should be better positioned to make a more informed decision closer to 30 June 2025.

What next?

The Better Targeted Superannuation Concessions bill, which includes the proposed Division 296 legislation is still pending passage through Parliament. On 10 May, The Senate Economics Committee recommended no changes to the proposed legislation, indicating political support but also some contention.

The Government made no mention of it in the recent Federal Budget other than to set aside some money to help implement it for members of the Commonwealth defined benefit schemes.

The Bill continues to be debated in the House of Representatives. While the Government has the numbers in the House of Representatives, the Bill is likely to encounter some opposition in the Senate. The Government will need the support of the Australian Greens and at least two Independents in the Senate to pass the Bill.

It is important to note that the majority of our clients are unlikely to be impacted by this proposed legislation as they will never have superannuation balances exceeding $3 million.  However, for those potentially affected, understanding the mechanics of this tax and considering long-term financial strategies is crucial.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.