Division 296 - What are the impacts? (Part B)

What are the impacts?

Trust Deeds and Governing Rules should be amended to permit the trustee to action release authorities, issued in relation to Division 296 tax assessments – that is, pay the required amount to the ATO and negatively adjust the relevant taxpayer’s superannuation accounts.

Trust Deeds and Governing Rules should be amended to permit the Trustee to operate investment portfolios – so that superannuation earnings arising from a particular asset portfolio are only attributed to superannuation interests, which participate in the relevant portfolio.

For SMSF which are on Version 03/26 of the SUPERCentral / TBCL Governing Rules these changes have already been made.

Most likely, accounting and audit costs will increase as SMSF trustees will need to determine Division 296 Fund Earnings, and need to allocate those earnings to any superannuation interest which existed during the income year. The allocation will have to be on a basis which is fair and reasonable and which accords with the allocation principles which will be set out in regulations.

Most likely, fund return preparation costs will also increase as additional information has to be reported to the ATO for Division 296 purposes.

These costs will be incurred even if no member of the fund will be liable for Division 296 tax.

The trustee will have to consider whether to reset/uplift the cost base of CGT assets held on 30 June 2026. This decision will have to be made before 30 June 2026 (even though the election only has to be made by the time the 2027 annual report is lodged or required to be lodged – whichever first occurs) given the “all or none” aspect of the election. Trustees cannot cherry-pick which CGT assets are to be reset/uplifted. Consequently, the trustee should consider whether certain assets should be cashed out before 30 June 2026. This uplift, if applied, only applies for the purposes of calculating Division 296 Tax.

While only members who have large superannuation balances (above $3m and above $10) will be directly affected by Division 296; that is potentially, liable for Division 296 tax assessments, all members will bear the cost of providing further information to the ATO.

Given that the value of the superannuation interest supporting death benefit income streams will be counted as part of the TSB of the taxpayer receiving the income stream, some members’ TSBs may materially increase in the income year, in which death occurs, beyond the $3m (or $10m thresholds). If A and B (spouses) are each receiving retirement phase reversionary income streams, where the TSB value of each of the pension streams is $1.8m (so individually below the $3m Division 296 threshold), then on the death of A and the automatic transfer of A’s pension to B, then B will have a TSB of $3.6m (once the value of the transferred income stream is credited to B’s transfer balance account 12 months later) and liable to a Division 296 tax assessment.

Recipients of child pensions (even child pensions payable beyond the child attaining age 25 due to permanent disability) are excluded from the reach of Division 296. The exclusion is so broadly expressed that if the child recipient is receiving a non-death benefit income stream, that other income stream is also excluded from the reach of Division 296.

In the period before 30 June 2026, the SMSF Adviser needs to determine in respect of each current CGT asset (and each CGT asset subsequently before 30 June 2026) whether it is beneficial to uplift the cost base of CGT assets (for Division 296 purposes) to their market value as at 30 June 2026 from those CGT assets where it is not beneficial, and then decide whether they will need to identify any CGT assets which should be cashed out before 30 June 2026, so that the CGT uplift election can be made.

- for clients nearing retirement or attaining age 65 and who are likely, in the near future, to be adversely affected by Division 296 then the same considerations as above will apply but there is a longer time frame in which to consider the relevant issues;
- for clients with low balances and recently commenced super and given the current dollar values of the concessional and non-concessional contributions caps – it is likely that they will not be affected by Division 296 tax (assuming the indexation arrangements for the $3m and $10m thresholds are not subsequently changed) unless CGT non-contributions are made.

Advisors/Accountants need to identify those LRBAs which are cashflow positive (which will add to superannuation earnings) from those LRBAs which are cashflow negative (which will not add to superannuation earnings) – are cashflow negative LRBAs more attractive in a post Division 296 world?

Advisers/Accountants will need to identify clients who are in receipt of death benefit pensions – superannuation interests supporting death benefit pensions – as Division 296 Fund Earnings will be allocated to the pension recipient.

Advisers /Accountants will need to consider whether SMSF should take advantage of the CGT cost base uplift for Division 296 purposes for those assets held on 30 June 2026 – this decision must be made by due date for lodgement of the fund’s annual report for 2027 income year – this could be:

- 31 October 2026 for some self prepares,
- 28 February 2027 (for first year return for via tax agent); and
- existing funds via tax agent – generally 15 May 2027.

Will the $3m (low Division 296 threshold) become the de facto upper limit for superannuation balances?