CPD: Division 296 is just the start – why more advisers are diversifying away tax and policy risk for clients

Division 296 signals rising policy risk, prompting advisers to diversify structures and reduce reliance on any single tax environment.

Looking beyond traditional forms of risk

Chat about risk with any adviser, and it’s likely to cover some predictable territory: Market risk. Concentration risk. Sequencing risk. Inflation. Longevity. These are, after all, the foundation of almost every client conversation, and minimising their impact is the basis of almost every financial plan.

But there’s another risk that is becoming harder to ignore, and it’s not coming from markets.

It’s coming from governments.

Over the past decade, superannuation alone has been subject to a near-constant cycle of reform: contribution caps, transfer balance caps, Division 293, and the recently confirmed Division 296 tax are just some of the examples. While each of these changes may have seemed incremental in isolation, collectively they have significantly reshaped the long-term outcomes from superannuation investments, and the effectiveness of strategies designed to optimise those outcomes.

There is a subtle but undeniable tension emerging. As highlighted in recent Generation Life research^[1]:

“Our retirement system is built for long-term horizons yet repeatedly shaped by policy measures introduced across successive election cycles”.

This year alone, in addition to the application of Division 296 to super balances over $3m, the Federal Government is also mulling changes to the Capital Gains Tax (CGT) discount^[2], impacting the effectiveness of various strategies, including property investing.

These are unlikely to be isolated events, regardless of who is in government.

In such an environment, mitigating risk therefore means looking beyond asset diversification. It means also diversifying structures and strategies to make portfolios resilient in the face of almost inevitable change. And the adviser’s role in this is increasingly to interpret, not just inform – translating shifting policy settings into clear strategic implications and helping clients make decisions with confidence, despite the uncertainty.

In this article, we explore how Division 296 and other emerging policy changes create risks for clients, why structural diversification is a crucial mitigant of such risks, and how investment bonds are one of the structures advisers are increasingly utilising to achieve this diversification.

Division 296: more than just a tax change

Few superannuation changes have seemed so convoluted as the Division 296 tax. First proposed in 2023^[3] – and eventually becoming law in 2026 – the original name of the reform (‘Better Targeted Superannuation Concessions’) provides a useful insight into both the possibility, and focus, of future changes. But whilst much of the associated narrative surrounded the specifics of the tax, the more powerful signal lies in what Division 296 might represent longer term.

While superannuation changes are nothing new, for much of its history these changes have been applied on a relatively consistent and uniform basis across all members, with the aim of encouraging the accumulation of retirement savings across the population, regardless of wealth or income. That began to change with Division 293, which introduced additional tax on concessional contributions for higher income earners^[4].

Division 296 extends that shift even further, meaning superannuation is no longer operating as a single concessional regime.

Under Division 296, an additional tax of 15% now applies to earnings on balances above $3 million, with a further 10% (making a total of 40%) applying to balances in excess of $10m^[5]. This change sees super increasingly structured as a tiered system, where investment outcomes vary depending on the balance size and income of members.

But this is about more than the actual rates of tax. The introduction of thresholds, differential rates and targeted settings reflects a system that is becoming more complex, more segmented, and more susceptible to ‘adjustment’ over time. The scope and limits of Division 296 might be set for today, but what we now have in place is a framework through which even more tiering of benefits can occur.

For advisers, this has two implications.

Firstly, outcomes for clients – especially HNW – are likely to be increasingly exposed to policy/regulatory risk. Changes to thresholds, rates or definitions can materially alter long-term outcomes from particular strategies and structures, especially for clients operating close to relevant limits.

Secondly and more fundamentally, Division 296 spotlights a different type of concentration risk: overexposure to a single tax environment – a risk exacerbated where that environment is subject to increasing flux.

Policy risk is expanding – beyond super

Australia’s shifting legislative environment is undoubtedly a major determinant of after-tax outcomes for investors. But whilst many of the headlines focus – understandably – on changes to super, in reality there are many areas of wealth that remain under a constant spectre of regulatory intervention and rule changes.

The recently proposed lowering of the capital gains tax (CGT) discount is a case in point. Whilst the quantum or form of this reduction was not known at the time of publishing this article, what is clear is that any reduction in the discount would directly alter the after-tax return profile of geared investment strategies, involving both property and equities. Strategies that rely on the interaction between leverage and concessional CGT treatment would therefore need to be reassessed as a matter of priority.

At the same time, property investors are increasingly exposed to state-based taxes and regulations. Land tax regimes, vacancy taxes, and short-stay accommodation levies are now in place across most of the country, usually with very little alignment between jurisdictions. For clients with concentrated exposure to a single state or asset class, these changes can materially affect holding costs and long-term returns.

Family trust structures are also coming under increased scrutiny. Recent ATO activity^[6] targeting what it describes as “excessive” income splitting highlights a growing focus on how trusts are being used in practice, particularly among higher-income individuals. While this does not yet represent a wholesale change to trust law, it reinforces a broader point: policy risk is not limited to legislative reform. It also arises through changes in interpretation, enforcement and administrative focus, which can materially alter how existing structures are treated over time.

Changes to franking credits were taken to the 2019 election – unsuccessfully – by Bill Shorten, and it’s reasonable to assume a more strongly positioned government might propose some sort of change again in the future.

And of course, superannuation itself is not immune to further adjustment. While the tax-free status of pension phase investment earnings remains intact, it has already been subject to one limitation, via the Transfer Balance Cap. Over a 30 to 40-year investment horizon, it would be naïve to assume that the current settings will remain unchanged, particularly as fiscal pressures and population demographics continue to evolve.

For advisers, this means the challenge is not just about optimising client portfolios within the current rules, it is about interpreting how those rules may evolve, interact, and compound over time, and the potential client impact. In effect it means acting as a ‘Chief Interpretation Officer’.

Structural diversification is an important risk mitigant

Discretionary trusts, private companies, self-managed super funds, and investment-bond structures each deliver different regulatory, tax, and succession characteristics. Diversifying across these vehicles becomes a critical tool in reducing reliance on any single policy regime, and in building strategies that are more resilient to future changes.

A strong body of evidence supports the importance of structural diversification.

FT Adviser^[7] described diversification across tax wrappers as “essential for managing liquidity and policy uncertainty”, while a 2025 study^[8] by Krieg & Li provides direct evidence that diverse tax-planning strategies materially reduce exposure to policy and compliance risk. Analysing more than 4,000 firms, they found that those with more diversified tax strategies experienced lower volatility in effective tax rates, indicating reduced exposure to tax-related risk. While corporate in scope, the findings translate directly to a high-net-worth client context.

Investment bonds – outsmarting the government

If structural diversification is the response to rising policy risk, investment bonds are a clear example of how that principle is being applied in practice.

Unlike superannuation, investment bonds sit outside the super system and are not subject to contribution caps, preservation rules or balance thresholds. This distinction has become increasingly relevant as Division 296 introduces higher and more targeted taxation within super.

The appeal of investment bonds lies not simply in the opportunity to pay lower tax on earnings, but exposure to a different tax regime altogether (one that has remained materially unchanged for decades).

While the headline tax rate within an investment bond is 30%, the effective rate can be materially lower depending on the underlying assets. Where portfolios generate franked dividend income, internal tax rates can fall into the low teens, and in some cases, closer to 10–11%^[9].

Compare this with the changing tax profile of superannuation. For balances above $3 million, earnings may now be taxed at up to 30%, and up to 40% for balances exceeding $10 million.

Over longer holding periods, these differences can become quite pronounced. Furthermore, subject to the 10-year rule, withdrawals from investment bonds can be received on a tax-paid basis, meaning that all capital growth and income within the structure can effectively become tax-free in the hands of the bond’s owner (or beneficiary).

As one adviser observed^[10], investment bonds are a structural loophole that can be used to “outsmart the government” on the new tax.

Importantly however, their role is not to replace superannuation, but to complement it.

Used alongside super, trusts and companies, investment bonds allow advisers to allocate capital across different tax environments, reducing reliance on any single set of rules, and introducing greater flexibility into long-term planning.

Structural diversification builds confidence and trust

In the same way that asset diversification gives investors more confidence in their ability to withstand market turbulence, so too is there an emotional dividend from structural diversification.

Evidence from the Oxford Business School and Centre for Business Taxation¹¹ suggests that investor behaviour is shaped not just by the level of tax, but by the predictability of the tax system itself. Where that predictability weakens, so too does the willingness to commit to long-term strategies. At an individual level, stability facilitates more commitment to a strategy.

In Australia, research¹² from Generation Life highlights that while overall confidence in the retirement system remains high, around two-thirds of investors believe the rules change too often and are difficult to follow. This uncertainty can manifest as a lack of confidence, and a lack of belief, which in turn can lead to reactive, emotionally charged decision making.

That same research found that confidence is now the #1 value HNW clients seek from their adviser^[13].

Policy risk is not just a structural challenge, but a behavioural one. It influences not only what strategies are optimal, but whether clients are willing to adopt and persist with them.

Practical implications for advisers

For advisers, the implications are both structural and behavioural.

At a structural level, this means identifying where portfolios are concentrated within a single tax regime and deliberately diversifying across multiple tax and ownership structures to mitigate the impact of policy risk.

At a behavioural level, it means recognising that client outcomes depend not just on strategy design, but on confidence in that strategy over time. This is where the adviser’s role as an interpreter becomes critical, translating complexity into clarity, explaining exposures to different regimes, and helping clients maintain confidence in strategies that are designed to operate through changing regulations.

Conclusion

The Division 296 superannuation tax has rightly attracted headlines, being at the centre of a debate around superannuation concessions for high income, high balance investors. In anticipation of its implementation in July 2026, advisers have already been working with impacted clients, allocating away from super into a variety of alternative structures and products, including investment bonds¹⁴.

But the real takeaway is less to do with specific tax rates, and more to do with the risks of being exposed to single tax regimes in an environment of regulatory and policy uncertainty.

In the face of such uncertainty, advisers are increasingly recognising the importance of structural diversification. By allocating client portfolios across multiple tax environments – including superannuation, trusts, companies and investment bonds – advisers are able to achieve a balance of efficiency, flexibility and resilience. In an environment where regulation and tax rates continue to evolve, this approach represents a powerful way to manage risk and support more consistent long-term outcomes for clients.

Take the FAAA accredited quiz to earn 0.25 CPD hour:

CPD Quiz

The following CPD quiz is accredited by the FAAA at 0.25 hour.

Legislated CPD Area: Tax (Financial) Advice (0.25 hrs)

ASIC Knowledge Requirements: Financial Planning (0.25 hrs)

please log in to start this quiz

———

References:
[1] 2024/26 Navigating Uncertainty Report, Generation Life.
[2] https://www.thesenior.com.au/story/9205607/jim-chalmers-warns-of-hard-decisions-on-negative-gearing-cgt/
[3] https://www.mercer.com/en-au/insights/mercer-financial-advice/div296-update/
[4] https://www.vanguard.com.au/super/learn/super-tax/division-293-tax
[5] https://www.superguide.com.au/super-booster/super-tax-accounts-3-million
[6] https://www.afr.com/wealth/tax/ato-targets-high-earners-over-excessive-income-splitting-20251126-p5ninw
[7] https://www.ftadviser.com/content/3d792b3c-f79b-5b07-aa05-296ad6c9ef51
[8] https://www.sciencedirect.com/science/article/pii/S1815566925000372?utm
[9] https://www.afr.com/wealth/superannuation/wealthy-australians-show-how-to-outsmart-new-3m-super-division-296-tax-20260302-p5o6kb
[10] Ibid.
[11] https://www.sciencedirect.com/science/article/abs/pii/S0304405X21001628?via%3Dihub
[12] 2024/26 Navigating Uncertainty Report, Generation Life.
[13] Ibid.
[14] https://www.afr.com/wealth/superannuation/wealthy-australians-show-how-to-outsmart-new-3m-super-division-296-tax-20260302-p5o6kb