What Happens to Division 296 Tax When You Die

Division 296 — the additional tax on very large superannuation balances — commenced on 1 July 2026. It is settled law now rather than a proposal, and for the small number of Australians it touches, the mechanics have been picked over thoroughly.

One scenario has not been. What happens if a member dies? The answer for this financial year is unusually generous, and almost nobody seems to know it.

First, the shape of the tax

Division 296 applies an additional 15% to your taxable super earnings — broadly, the portion of earnings on all your super interests determined by the extent to which your total superannuation balance (TSB) exceeds a threshold. For the 2026–27 income year the large super balance threshold (LSBT) is $3 million, and a second, very large super balance threshold (VLSBT) sits at $10 million, above which a further 10% applies to the proportion of earnings relating to the excess over that higher threshold. Both thresholds are indexed in line with CPI (ATO, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/growing-and-keeping-track-of-your-super/caps-limits-and-tax-on-super-contributions/division-296-tax, as at August 2026).

Our article The Division 296 tax on super balances over $3 million covers the rate mechanics and the two-threshold structure in full. This article covers only what the other one does not: death.

The 2026–27 rule: if you die this financial year, you will never pay it

Transitional arrangements apply for the 2026–27 income year. The consequence, in the ATO's own terms, is that if you die in the 2026–27 income year you will never be liable to pay Division 296 tax.

The mechanism is worth understanding, because it explains why this is a one-year-only outcome rather than a general principle. For 2026–27 — the first year of the tax — the test looks at whether your TSB at 30 June 2027 exceeds the threshold. And after you die, the TSB value of your interests is nil for Division 296 purposes. No balance at 30 June 2027 means nothing to assess, so no liability arises at all.

That nil rule is not a loophole and it does not disappear in later years — but its effect changes. The ATO explains that setting the deceased's TSB to nil ensures taxable super earnings are determined using the proportion by which the TSB exceeded the LSBT at the start of the income year. In the first year there is no start-of-year figure to fall back on in the same way, which is precisely why 2026–27 produces a clean result and later years do not.

The ATO publishes the worked example, and it is worth reading slowly:

Alex has a total super balance of $4,200,000 at the end of 30 June 2026, and dies on 15 February 2027. As Alex died during the 2026–27 income year, he is not subject to Division 296 tax.

Four point two million dollars in superannuation, well over double the threshold, and no Division 296 liability whatsoever. If you are an executor or an attorney dealing with a high-balance estate right now, that is the single most useful fact on this page. It is also worth knowing before you spend money on advice about a Division 296 problem that, in this particular financial year, may not exist.

From 2027–28, the rules change

The transitional relief is exactly that. Once the 2026–27 year closes, a different rule takes over, and it is considerably less forgiving.

From then on, if you die during an income year and your TSB just before the start of that income year was over the threshold, you are assessed on super earnings for the interest until the earlier of all death benefits having been paid or distributed from the interest, or a death benefit income stream having commenced to be paid from it.

Two features of that make it awkward in practice. The first is that the earnings land in the wrong year: they are included in the Division 296 calculation for the income year in which you died, even where they actually relate to a later income year. The tax follows the death, not the calendar. The second is that the assessment moves — because those earnings are reported over time, the Division 296 assessment for the year of death is amended as they come in. An executor can therefore receive an assessment, deal with it, and then receive a revised one, potentially well after the death.

Who actually pays it

Any Division 296 assessment raised in these circumstances forms part of the deceased's final tax affairs. It may be paid from the deceased's superannuation interest, or from the estate.

That matters for anyone drafting or administering a will, because it is a liability that can land on the estate after the balance itself has gone somewhere else entirely — superannuation does not automatically form part of an estate, and a death benefit paid directly to a beneficiary can leave the residual estate carrying a tax bill for earnings on money it never received. Our article Your will doesn't control your super explains why super and the estate are separate systems in the first place.

The practical consequence: delay now has a price

Look again at what stops the assessment from 2027–28. It runs until the earlier of the benefits being fully paid out, or a death benefit income stream commencing. Which means the clock stops when the death benefit is actually dealt with — and keeps running while it is not.

Deceased estates are slow for entirely ordinary reasons: a nomination that needs verifying, a trustee exercising discretion, a family that cannot agree, a fund waiting on a death certificate. From 2027–28, for a high-balance member, that delay is no longer merely frustrating. It extends the period over which earnings are assessed under Division 296.

"Get the paperwork in promptly" is generic executor advice that everyone nods at and nobody acts on. For a Division 296 estate, it is the difference between one assessment and a longer, larger, amended one. Our article on deceased estate tax returns and executor obligations covers the broader compliance timeline.

The survivorship question — and a change that answers half of it

Here is the scenario that ought to concern couples. Take two people with roughly $2 million each in super, purely as an illustration. Neither is anywhere near the $3 million threshold. One dies, and the survivor inherits — commonly as a death benefit income stream.

Two things now follow, and the second one changed very recently.

The first is the transfer balance cap. When a spouse receives a death benefit income stream, the value of that income stream when it commences creates a transfer balance credit in the surviving spouse's transfer balance account. That is a separate constraint from Division 296, and our article on the transfer balance cap covers it.

The second is the one that matters here. From 30 June 2026, an individual's total super balance includes interests supporting death benefit super income streams in the retirement phase that they are entitled to receive payments from (ATO, https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/growing-and-keeping-track-of-your-super/caps-limits-and-tax-on-super-contributions/total-superannuation-balance). The ATO has published this as a change to how total super balance is calculated, effective from that date. Since Division 296 turns on TSB, an inherited death benefit income stream can therefore enlarge the survivor's total super balance — the mechanism plainly operates, and the timing is no coincidence: it lands on the same date the new tax comes into view.

What we are not going to tell you is that any particular survivor will end up paying Division 296 tax. Whether an enlarged TSB actually produces a liability depends on the full calculation for that person in that year, and that is an individual question rather than a general one. But the shape of the risk is now clear enough to plan around: two balances that are each comfortably under the threshold can become one balance that is not, and the rule that makes that possible is only weeks old. If your planning predates 30 June 2026, it may have been built on the previous definition.

Worked examples

These are illustrations, not predictions. The only ATO figures used are those cited above.

Margaret, 71, executor for her brother David, who died in November 2026 with about $4 million in super. She has been quoted for advice on a Division 296 problem. On these facts the ATO's position is directly on point: David died during the 2026–27 income year, so there is no Division 296 liability at all, regardless of the size of the balance — the same outcome as the ATO's own published example. What is generally rational here is to confirm that in writing before commissioning work on it, then redirect attention to the things that genuinely do apply to David's estate: the death benefit tax treatment, the transfer balance position of any beneficiary who takes an income stream, and the estate administration itself. The Division 296 question, for this one year, answers itself.

Frank and Susan, 69 and 67, with roughly $2 million each in super. Neither is near the threshold and neither has ever considered Division 296 their problem. If one dies and the survivor takes the balance as a death benefit income stream in the retirement phase, the survivor's own total super balance now includes that interest — which is what changed on 30 June 2026. On these facts what is generally rational is not to assume a liability and not to assume its absence, but to put the specific survivorship question to an adviser before the nominations are settled, because the nomination is the lever that determines whether the money arrives as an income stream in the survivor's hands at all. It is a question best asked while both people are alive and able to change the answer.

What to take from this

If you are dealing with a death that has occurred in the 2026–27 financial year, there is no Division 296 liability, regardless of how large the balance was. Confirm it, then move on to the things that do matter — the death benefit tax treatment, the transfer balance cap position of any beneficiary receiving an income stream, and the estate itself.

If you are planning rather than administering, the relief is for this year only. From 2027–28 the general rule applies, the assessment is part of the deceased's final tax affairs, and the speed with which the death benefit is dealt with directly affects how long earnings keep being assessed. Current, valid nominations are what make that speed possible — which is the practical case for reviewing them now rather than treating them as filed and forgotten. Our articles on binding death benefit nominations and super death benefits and estate planning cover that ground.

And if you are a couple with substantial super between you, the survivorship question is the one to put to an adviser specifically. It is the shape most likely to create a Division 296 exposure that neither of you has today, and the rule that makes it possible only took effect on 30 June 2026.

Sources

• ATO — Division 296 tax
• ATO — How Division 296 tax is calculated
• ATO — Division 296 tax on large super balances
• ATO — Total superannuation balance
• ATO — How Total Super Balance is calculated has changed
• ATO — Superannuation death benefits