Division 296 and Super: What Property Investors Need to Know

Plenty has happened since we wrote this post. Check out Jim Chalmers’ recent announcement on Division 296 in our more recent blog post here.

If you own property inside super, you’ve probably noticed a new term being thrown around: Division 296.

Division 296 is the government’s plan to add an extra layer of tax for those with balances above $3 million. On the surface that sounds simple (maybe even fair), but the way it’s structured has sparked plenty of concern — especially if you’ve got illiquid assets like property tied up in your SMSF.

Let’s say you hold a commercial building in your fund worth around $3.2 million. Nothing’s changed with the lease; the tenant’s paying on time and you haven’t sold a thing. But on 30 June the valuer says it’s worth $3.4 million. Under the current proposal, you could still end up with a tax bill on that $200,000 gain. No cash in your hand, but cash still due to the ATO.

That’s why Division 296 has become such a hot topic.

Today, we’ll dive into this controversial proposal further, explaining what’s being introduced and what it might mean for property investors.

What is Division 296?

Division 296 is a proposed extra 15 per cent tax on superannuation earnings linked to balances above $3 million. Rather than just looking at rental income, it measures the change in your super balance from one year to the next. That means gains — purely on paper — are taken into account.

If it becomes law, the first measurement period begins in July 2025. Because the $3 million cap isn’t set to rise with inflation, more people will eventually be caught by it as property values climb.

Why is it being introduced?

By taxing the portion above $3 million more heavily, the government says it’s “better targeting” concessions.

But the reality for many property investors is different.

Plenty of long-time SMSF trustees simply held onto assets through multiple growth cycles. They didn’t design super as a tax shelter — the market did the work. They are being punished for well-made decisions.

Why are SMSF members worried?

From a property lens, three issues stand out:

1. Taxing unrealised gains: Cash doesn’t flow just because a valuer changes their number. Paying tax on a revaluation feels disconnected from real-world income.
2. Liquidity: An investor with a $5 million property in their SMSF might be asset-rich but cash-poor. Finding money for a tax bill based on a “desk calculation” is no small feat.
3. Immune to inflation: The $3 million cap doesn’t move with inflation. So, even if you’re nowhere near it today, steady growth in property values could put you there in a decade.

What it could mean for property investors

For property investors holding property in their SMSF, valuations will take on new importance. In the past, many SMSFs only thought about valuations for compliance purposes only. But with Division 296, the number on that valuation could directly shape your tax bill. It’s never been more important that valuations reflect market reality.

If your SMSF is almost entirely property, also consider whether you’ve got enough of a cash buffer to handle a Division 296 bill in a good year. Nobody wants to sell a quality asset just to pay tax, but that may be the reality for those who can’t afford the tax bills out of pocket.

And in two-member funds, remember the cap applies to each individual. Together that’s $6 million, but how assets are split between members will affect exposure.

Where things stand now

Division 296 hasn’t passed Parliament. The bills have been delayed, and industry groups are pushing hard to remove unrealised gains from the formula and to index the cap. It’s still unknown how the final rules will take shape.

The earliest start date would be the 2025–26 financial year. That means balances on 1 July 2025 could be the first point used to calculate exposure.

P&P’s take

We’re not tax advisers — our expertise is in property. And what we see is that Division 296 puts more weight on two fundamentals: having accurate valuations and planning for cash flow.

Policy shifts will come and go, but property remains a long-game asset. Stay prepared, stay abreast of updates in the SMSF space and keep an eye out for inflated valuations on your property. That way, if Division 296 does land, you can handle your potential tax exposure without pivoting your investment strategy.

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