This is our second article on the draft legislation for the new Div 296. Our first article examined the core legislation. This article will examine the transitional rules including the CGT adjustment and two rules that just apply for the 2026/27 year.
The CGT adjustment (for Div 296 purposes only)
The transitional provisions allow SMSFs to elect that the cost base of assets that they hold on 30 June 2026 be reset to market value on that date. However, unlike the transfer balance cap transitional rules, this adjustment will be for Div 296 purposes only and not for the SMSF’s normal tax rules.
The election must be made for all assets (unlike the transfer balance cap transitional rules which applied on an asset by asset basis). This will be a disadvantage for any assets that have dropped in value such that their market value is less than their cost base.
A simple solution to this issue is for the CGT adjustment to be the greater of the asset’s cost base or market value. It is hoped that this change will be made to the final legislation.
The due date for SMSFs to make the election will be until the date that their tax return is due for the 2026/27 year. The SMSF will need to keep records of the election and market value for 5 years.
The following is an example from the draft EM on how the CGT adjustment would work:
Example 1.12 Choosing the CGT adjustment for the CGT assets of a SMSF
Oscar is a member of an SMSF that holds a single CGT asset purchased in 2010 for $200,000. The asset’s market value on 30 June 2026 is $500,000.
Oscar has a TSB over the $3 million threshold and expects to incur a Division 296 liability.
The trustee elects to apply the CGT adjustment using the approved form. For Division 296 purposes, the asset’s cost base is adjusted to its market value of $500,000 on 30 June 2026.
In the 2027-28 income year, the SMSF sells the asset for $550,000. For fund tax purposes, the capital gain is calculated using the original cost base of $200,000, resulting in a gain of $350,000. As the asset was held for more than 12 months, the fund applies the one-third CGT discount, reducing the taxable gain to $233,333 (two-thirds of $350,000).
For Division 296 purposes, the fund is required to calculate a modified net capital gain using the adjusted cost base of $500,000. As such, the fund includes capital gains of $50,000 in the modified net capital gain calculation. This would give the fund a modified net capital gain of $33,333 after the application of the relevant CGT discount .
TSB opening balance not counted in the first year
The draft legislation provides that you are caught by the measure if your total superannuation balance is greater than $3 million at the end of the financial year or at the start of the financial year.
As a result, a member who has an opening balance of $3 million or more at the start of a financial year could not avoid Div 296 in that year by reducing their balance by the end of the year (which you could do under the previous version of Div 296).
Further, members whose account balances go down during the year, such that that they drop below $3 million in total super balance, can still receive a Div 296 tax liability even though they have less than $3 million in super.
However, there is one exception to this – the 2026/27 year. In that year, only the closing balance will be measured.
This means that for members who don’t want to trigger Div 296 tax, they will have until 30 June 2027 to reduce their super balances below $3 million.
This will give all members more time to work out whether, and to what extent, they wish to withdraw super benefits before the first Div 296 tax assessments are issued.
Div 296 does not apply to dead members in the 2026/27 year
The old Div 296 did not apply to members in the year they died.
Unfortunately, the new measure will apply to deceased members in the year of their death.
The one exception for this application is the 2026/27 year, such that, if a member dies in that year, their estate will not receive a Div 296 tax assessment.
Issues with the Div 296 regime for deceased members
The following issues have been raised with the application of Div 296 to deceased members (as outlined in the submission made by Treasury by the Institute of Financial Professionals Association):
While the Bill provides that an individual who dies before 30 June 2027 will not be liable for Division 296 tax for the 2026-27 income year, no equivalent exclusion applies in later years. From 1 July 2027 onwards, deceased members will be captured by Division 296, even where their superannuation has been fully distributed before the assessment is issued. This raises serious practical concerns, particularly where there is no remaining superannuation interest or deceased estate from which to satisfy the tax liability.
In practice, Division 296 assessments may be issued many months after death, often after probate has been granted and estate assets have already been distributed. Executors may therefore be faced with a tax liability at a point in time when they have no remaining assets under their control. This is compounded by the fact that executors frequently have limited visibility over the deceased member’s superannuation position and potential Division 296 exposure, in contrast to the relative certainty associated with preparing an estate income tax return.
For example, assume a member dies in December 2027 and their superannuation is fully distributed shortly thereafter. Probate is applied for and the estate is fully administered and distributed to the beneficiaries by October 2028. A Division 296 assessment is then issued to the deceased/executor in June 2029 based on the deceased member’s opening TSB. The executor therefore has a Division
296 tax liability despite there being no superannuation benefits and no estate assets remaining from which the tax can be paid. In such cases, the executor may personally bear the Division 296 tax liability.
Further inequity could arise where an executor receives the Division 296 tax liability in the situation where the death benefits are not paid to the estate but rather to a non-beneficiary of the estate. For example, Person A dies leaving all his superannuation to second spouse B. A’s estate goes to his two children from his first marriage – C and D. In this example, the Division 296 tax liability will be borne by C and D, even though the superannuation death benefits went to B. This is obviously an inequitable result.
Further complexity arises where death benefits are paid partly as a pension to a surviving spouse and partly as a lump sum, including to other beneficiaries. This could result in individuals who have never previously been subject to Division 296, such as surviving spouses whose balances exceed $3 million for the first time, being unexpectedly brought within the tax net as a direct consequence of death.
Death is also a point at which significant capital gains are often realised, potentially inflating Division 296 “earnings” in the final year and exacerbating the unfairness of the outcome.
Finally, the drafting of the death-related exclusion gives rise to significant concern. The distinction based on whether death occurs “before 30 June” rather than “on or before 30 June” appears arbitrary and suggests a possible drafting error, as it creates an unjustifiable differential outcome for deaths occurring on the final day of the income year. While this anomaly existed in earlier versions of the legislation, the revised Bill exacerbates the issue by removing the broader death exclusion altogether, with the result that deceased members are brought within the scope of Division 296 from the 2027-28 income year. This approach produces outcomes that turn on the precise date of death rather than on coherent policy principle or administrative practicality.
Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E pbroderick@sladen.com.au
Philippa Briglia
Special Counsel
T +61 3 9611 0174 | M +61 449 404 801
E: pbriglia@sladen.com.au
Jan Harnischmacher
Associate
T +61 3 9611 0158
E joh@sladen.com.au
Andrea Lin
Lawyer
T +61 3 9611 0189
E alin@sladen.com.au
