How might they be affected?
Joe is 70 and retired, whereas his wife Mary is 67 and has yet to receive any retirement benefits from her super savings.
Joe’s Total Super Balance (TSB) is $3.1 million, including $2 million in a super income stream (in this case, an Account-Based Pension or ABP).
Mary’s total super balance is $1.5 million, which is all in the accumulation phase of Super.
With new rules introducing an extra 15% tax (Division 296) on individuals with more than $3 million in super from 1 July 2026, Joe is concerned about paying additional tax on his earnings.
In order to reduce or eliminate this new tax, we must keep Joe and Mary’s retirement savings in line with their goals, income needs, and risk tolerance.
Reducing Joe’s super balance
The most direct way to avoid the new tax is to bring Joe’s Total Super Balance (TSB) below $3 million before the date his balance will first be assessed under the proposed Division 296 tax rules. While the proposed legislation is yet to pass, the Federal Government is aiming for a 1 July 2026 start date with super balances and fund earnings assessed on 30 June 2027 to calculate any extra tax payable. It is possible to achieve this goal by utilising two different strategies.
Strategy #1 – Spouse Contribution Strategy
Joe can move funds from his super savings to Mary. To do this, he must first withdraw at least $100,000 from his super account (tax-free) and deposit it into a bank account. He will then need to deposit this amount into Mary’s super account as an after-tax (non-concessional) contribution.
Mary should first confirm that she is eligible to make the above after-tax (non-concessional) contribution to her super account based upon her age and past contribution history.
Mary could then potentially start an Account-Based Pension (ABP), moving these funds into the tax-free retirement phase.
Outcome:
Joe’s super balance falls below $3 million, potentially removing his Division 296 tax exposure.
Mary’s balance increases to around $1.6 million, and her future earnings become tax-free in the scenario where she commences an ABP.
Benefit:
This is highly tax-efficient and relatively low-risk. It keeps the couple’s money inside the super system, where earnings are either tax-free or taxed at a maximum rate of 15%, and ensures both make full use of their respective tax-free retirement phase limits.
Strategy #2 – Lump sum withdrawal to personal investments
Joe could also withdraw a lump sum from super and invest it in his own name.
Outcome:
This reduces Joe’s TSB below $3 million and removes the potential for a Division 296 tax liability in the short-term. However, future income and capital gains on the withdrawn money would be taxed at Joe’s marginal rate (up to 47%), which could be far higher than super’s concessional rates so he would have to be very careful as to how much he withdraws whilst considering his personal income tax position and how much money he receives from his existing ABP. Joe should also be aware that if his remaining super grows in future beyond $3 million, he may become liable to pay the Division 296 tax in a future financial year.
Is this a good idea?
While this approach removes the new tax, it potentially results in a worse long-term tax outcome and may not be suitable unless Joe specifically wants greater flexibility or access to those funds.
Other options – Adjusting investment strategy to reduce tax
Joe could also consider modifying his investment mix to reduce the “earnings” used in the Division 296 tax calculation.
The new tax is applied to the increase in the value of his super (including interest, dividends, any other investment income and realised capital gains) that relates to the portion above $3 million.
Possible adjustments:
Focusing on long-term growth assets (e.g., equities held for long periods) that don’t realise large gains each year.
Reducing exposure to high-yield assets that generate large taxable income annually.
These changes could moderately reduce the taxable “earnings” and, in turn, lower the new tax. However, the impact will vary depending on market conditions and investment timing.
What about franking credits on Australian shares?
Joe asked whether increasing Australian share exposure could help reduce his tax. While franking credits can help offset tax inside super in accumulation phase or provide a tax credit in the pension phase, they do not reduce additional taxes attributable to Division 296. This is because the extra tax is levied on the individual, not the Super fund.
Calculating the amount of tax that Joe would pay is complicated but is based on the proportion of income received for amounts above $3 million (i.e. $100,000 for Joe). Australian shares can still be valuable for their long-term return potential, tax-efficiency, and income stability, but they won’t directly reduce this particular tax.
Balancing tax and investment goals
It’s important to remember that while tax is an important consideration, investment decisions should always reflect:
• Joe and Mary’s income needs in retirement,
• Their tolerance for investment risk, and
• The need to protect and grow their retirement savings appropriately at their stage of life.
The withdrawal and spouse contribution strategy is a highly practical and effective option here. It directly addresses the tax issue while keeping their investments consistent with their current long-term retirement objectives and comfort levels.
Did you find this summary helpful?
Or are there other concerns you have about super and tax?
Tax implications on super and non-super assets are complex. If you are concerned about calculating how tax will be applied to your assets, it’s helpful to check your options with a trusted professional.
Retirement Essentials offers affordable Retirement Advice Consultations with experienced advisers with whom you can share your particular situation and explore possible solutions as Joe and Mary did with Andrew.
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.
