The $3 million Division 296 legislation has now passed through both houses of Parliament and has received Royal Assent. As a result, trustees, accountants and advisers can now plan with certainty for the introduction of this tax from 1 July 2026.
This article focuses on a common scenario where members are currently under the $3 million threshold and therefore not affected today, but may be impacted in the future. In particular, it explores the potential consequences following the death of one member, as well as a key nomination decision available to SMSF trustees at 30 June 2026.
Example
Current Position
Trent and Trish are both 67 and in retirement phase, with their superannuation balances fully in pension mode. As at 30 June 2027, they each have balances of approximately $2 million.
30 June 2027 is the first date on which the ATO will assess whether a member’s total super balance exceeds $3 million and is therefore subject to Division 296 tax. At this point, neither Trent nor Trish has anything to be concerned about.
Future Event
In October 2027, Trent passes away. He has a nomination in place for his superannuation to be paid to Trish as a pension. As a result, Trish now has $4 million in superannuation. She is able to roll back her existing pension into accumulation and retain Trent’s balance within super by commencing a death benefit pension.
If Trish does not withdraw the excess amount above $3 million from superannuation, she will be liable for Division 296 tax at 30 June 2028.
Whether withdrawing the excess amount is appropriate will depend on her personal circumstances. Relevant considerations include her marginal tax rate outside super, any death benefit tax exposure, and how this aligns with her broader estate planning and current will.
Calculation of Tax
Assume Trish decides to retain the full balance in superannuation and has a total balance of $4 million at 30 June 2028. If the fund records ‘earnings’ of $200,000 for the year, her Division 296 tax would be calculated as follows:
$200,000 × 25% (proportion of the balance above $3 million) × 15% = $7,500.
Key Takeaways
- Being aware that Division 296 may apply in the future is critical for effective planning, even if your current balance is below $3 million.
- For SMSFs, the calculation of ‘earnings’ for Division 296 purposes can be adjusted for CGT if trustees make an election at 30 June 2026. Where this election is made, only realised gains from 30 June 2026 onwards are included in the Division 296 calculation.
Planning Opportunity – CGT election at 30 June 2026
As a planning strategy, Trent and Trish could elect at 30 June 2026 to uplift the cost bases of their SMSF investments to market value. This CGT adjustment applies solely for Division 296 purposes.
Key points to note in relation to this election include:
- The election is generally only appropriate where the fund’s investments are sitting on an overall unrealised gain at 30 June 2026.
- The election applies to all investments within the fund; individual assets cannot be selected. Careful consideration is therefore required.
- Once made, only realised gains from 30 June 2026 onwards are included in the Division 296 calculation.
- The election is irrevocable.
- If the election is not made at this time, it cannot be made later when a member’s balance exceeds $3 million.
- The election must be made by the lodgement date of the 30 June 2027 return.
If you would like to discuss how these strategies may apply to your circumstances, or if you have any questions regarding superannuation more broadly, please contact one of our superannuation specialists.
Remaining vigilant about the potential impact of Division 296 tax — even where balances are currently below $3 million — is essential to effective and proactive superannuation planning.
