Division 296: What SMSF Trustees Actually Need to Know

After three years of drafts, backlash, and redesigns, Division 296 is now law and applies from today, 1 July 2026. If you run an SMSF with a healthy balance, this is required reading, but the detail that catches people out isn't always the headline tax rate. It's what happens to a couple's total super balance the day one of them dies.

This isn't an SMSF-only issue

Division 296 is a personal tax on the individual, not the fund. It's triggered by your Total Superannuation Balance (TSB); the sum of everything you hold across every fund you're a member of, aggregated together.

It applies identically whether that balance sits in an SMSF, an industry fund, a retail fund, or a defined benefit interest. If your combined TSB across all funds is above $3 million, you're in scope, regardless of where the money sits.

What actually changed from the original proposal

The version of Division 296 that generated the most alarm, taxing unrealised, on-paper gains every year, with no indexation, is not what passed. The final legislation looks materially different from the early drafts, and a lot of the fear that's still floating around client conversations is based on a design that no longer exists.

Original 2023 proposal (not law)	What actually passed
Tax on unrealised (paper) gains each year	Only realised earnings are taxed; interest, dividends, rent, and gains on assets actually sold
Fixed $3m threshold, no indexation	$3m threshold indexed in $150,000 steps; $10m threshold indexed in $500,000 steps, tied to CPI
No cost base relief for existing gains	SMSFs can elect to reset asset cost bases to 30 June 2026 market value for Div 296 purposes

How the tax actually works

Division 296 adds extra tax on the portion of your superannuation earnings attributable to the part of your balance above $3 million. It sits on top of the existing 15% tax already paid on earnings in accumulation phase.

Portion of balance	Additional Div 296 tax	Total tax on earnings
Up to $3 million	No change	15% (existing fund tax)
$3 million to $10 million	+15%	30%
Above $10 million	+25%	40%

- Earnings caught include interest, dividends, rent, and realised capital gains, the same items that already form part of ordinary fund taxable income.

- Both thresholds are indexed to CPI, in $150,000 increments for the $3m threshold and $500,000 increments for the $10m threshold, a direct response to criticism that the original fixed thresholds would catch more people over time through bracket creep alone.

- For the 2026-27 financial year only, your TSB is measured solely at 30 June 2027; not the higher of your opening and closing balance, which becomes the ongoing rule from 2027-28. This gives a one-off window to manage your position before the measurement date.

The SMSF cost base reset - a one-off, all-or-nothing election

SMSFs can elect to reset the cost base of their CGT assets to market value as at 30 June 2026, purely for Division 296 earnings calculations. Any gain that accrued before that date is quarantined from Division 296, only growth from 1 July 2026 onward counts toward future Division 296 earnings when an asset is eventually sold.

- The election applies to every CGT asset the fund holds, it cannot be made asset by asset, so funds sitting on both gains and losses need to weigh the full portfolio effect.

- It is irrevocable once made, and must be lodged with the fund's 2026-27 annual return.

- It has no effect on the ordinary CGT calculation when an asset is actually sold, that still uses the real, original cost base. The reset only changes the Division 296 earnings figure.

- Getting current market valuations for property and unlisted assets held at 30 June 2026 is the practical first step; you can't model the election without them.

The overlooked issue: reversionary pensions and death

This is where Division 296 has the most sting for couples who haven't reviewed their estate planning since the new rules landed.

How it catches people out

Picture a couple who each hold $2 million in their SMSF, comfortably under the $3 million threshold individually. One partner dies, and their pension is reversionary, meaning it automatically continues to the survivor without any new pension needing to be started.

The survivor's total super balance jumps to $4 million overnight. Even though their personal transfer balance cap isn't affected for 12 months, so the pension keeps paying tax-free income for now, their TSB for Division 296 purposes has already moved. If that balance is still above $3 million at the relevant measurement date, they're now in scope for a tax they may never have planned for.

A few practical points worth raising with clients who have reversionary pensions and combined balances approaching or above $3 million:

- Reversionary pensions remain one of the cleanest estate planning tools available, automatic continuation, no binding death benefit nomination required, no gap in income for the survivor. Division 296 doesn't remove that benefit, but it does add a tax consequence that wasn't there before and needs to be weighed against it.

- Because TSB for the first year is only measured at 30 June, a surviving spouse may have a window to withdraw enough to bring their balance back under $3 million before the measurement date, but this trades away tax-free pension earnings to avoid Division 296, and the two don't always net out in the survivor's favour. It comes down to the numbers for each couple.

- Delaying the start of a death benefit pension purely to dodge Division 296 is not a safe strategy; SIS rules still require a deceased member's benefits to be cashed as soon as practicable, generally within six months, regardless of the tax outcome.

- Whether to convert a reversionary pension to non-reversionary is a live question for larger combined balances, but it's deed-dependent — some pensions can be varied by resolution, others require a full commutation and restart. It needs checking against the actual pension documentation, not just the trust deed in the abstract.

A second, related sting: earnings during estate administration

Division 296 earnings don't stop accruing the moment someone dies. Where death benefits take time to finalise - due to disputes, probate delays, or illiquid assets like property that can't be sold quickly - earnings can continue to be attributed to the deceased member's account for the duration of that administration period, in some cases stretching well beyond a single financial year.

- Selling fund assets to raise cash for a death benefit payment can itself trigger a realised gain that counts toward Division 296 earnings - often at the least convenient possible moment for the estate.

- For funds anticipating a drawn-out administration, this is worth factoring into cash flow and asset liquidity planning well ahead of time, not scrambled together after a death has occurred.

Where to start

If your combined super balance across all funds, SMSF, industry, retail, or defined benefit, is approaching or above $3 million, or you hold reversionary pensions as part of your estate plan, this is worth a proper review before the first Division 296 measurement date. Get in touch with the Funded Futures team and we'll work through what it means for your specific structure.

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