The Hidden Super Tax Trap: Why senior defined benefit scheme public servants and military personnel, especially women, could be unfairly hit by the new Division 296 tax.
If you’re a senior public servant or long-serving ADF member with a defined benefit super fund like PSS, CSS, MilitarySuper or DFRDB, a new tax could quietly catch you out — even if your super balance seems modest on paper.
From 1 July 2025, the Federal Government proposes to introduce Division 296, an additional 15% tax on the ‘earnings’ (or growth) attributed to the portion of your super balance above $3 million.
While this may sound like a tax targeting the ultra-wealthy, it could unfairly impact defined benefit members — particularly due to how “earnings” and super balances are calculated under draft regulations if they proceed with one of the proposals to value it using the family law method and factors.
What’s changing?
Currently:
If you’re receiving a defined benefit pension, your super is valued for transfer cap purposes using a standard formula — typically 16× your annual pension.
If you’re still working and contributing, your balance is calculated using internal scheme metrics like the Accrued Benefit Multiple (ABM) × Final Average Salary, as shown on your 30 June annual statement.
However, under draft regulations for Division 296, the ATO would calculate your total super balance using family law valuation (FLV) methods. These:
• Assume you’ll retire and receive a full lifetime pension,
• Ignore whether you plan to take a partial lump sum,
• Apply higher actuarial factors for women due to longer life expectancy,
• And produce notional balances significantly higher than member statements suggest.
This could result in defined benefit members — including those still working — being assessed as exceeding the $3 million cap when they’re not, in practical terms.
Impacts for Working Members (Accumulation Phase)
Even if you’re still working and a long way from retirement, Division 296 could impact you.
Your notional super balance will be projected based on your expected lifetime pension, calculated under family law factors. This means:
The higher your member contribution rate, the higher your projected pension — and therefore the higher your assessed balance for Div 296.
Even if you’re not accessing your super, or your actual retirement benefit ends up being lower, you could be taxed on this projected growth.
The 15% tax will apply only to the portion of earnings that relates to the balance above $3 million, but because of the valuation method, you may find yourself unexpectedly captured.
👉 You could be taxed on super you haven’t received, can’t access, and may never actually receive.
Impacts for Retirees (Pension Phase)
Defined benefit pensioners face a different challenge.
From 1 July 2025, the defined benefit income cap limits concessional tax treatment to $125,000 per year. Pension income above that:
Is taxable at marginal rates, and
Ineligible for pension tax offsets, pushing total effective tax rates potentially above 47%.
Division 296 would add another 15% tax — but only on the annual growth attributed to the portion of your total super balance above $3 million. Importantly, that growth includes CPI indexation applied to your defined benefit pension, even though this is outside your control.
As defined benefit pensions can’t usually be converted to lump sums, this tax will need to be paid from personal savings.
This issue is also relevant to retirees who have both defined benefit and accumulation super, where the total combined balance pushes them above the $3 million cap.
Why Women May Be Hit Hardest
Because family law valuations account for life expectancy, female members often receive higher valuation factors — meaning the same pension income can result in a higher assessed balance.
This means more women could:
Breach the $3 million threshold,
Pay more tax under Division 296,
And face reduced access to tax offsets or concessional treatment — despite not receiving more income.
It’s an unintended consequence that risks worsening the retirement wealth gap for women in defined benefit schemes.
This Isn’t Law Yet
The Division 296 tax is still in draft legislation, and the proposal to use family law valuation methods for defined benefit schemes has not been confirmed.
However, the direction is clear, and early action could help affected members understand and plan for the potential impact.
What You Can Do Now
Don’t rely solely on your annual super statement — your actual “taxable balance” may be significantly higher under these rules.
Request a family law valuation to estimate how your defined benefit interest would be assessed under Division 296.
After Div296 becomes law, chat with a financial planner about reviewing your contribution strategy (if still working) and broader retirement structure (if already retired or approaching retirement).
Final Thoughts
Division 296 is designed to tax earnings on large super balances. But for defined benefit members — particularly senior public servants and ADF personnel — the proposed rules may result in taxation on projected, not received, income.
You could face an extra tax burden simply due to:
• Scheme design,
• Member contribution rate, or
• CPI indexation on a pension you can’t restructure.
Now is the time to understand your exposure — and ensure the policy outcomes are fair for those who’ve dedicated their careers to serving the public.