Division 296 draft legislation introduced to Parliament

Last week the revised Division 296 draft legislation was introduced into Parliament, and some technical amendments have been made after the exposure draft consultation phase. We will explain some particular areas of concern and re-consider some questions we had raised in earlier Tax Alerts on this topic.

This draft legislation has been progressing at a rapid pace, and it appears the Government wants to get this legislation finalised as soon as possible, with these Division 296 rules set to apply from 1 July 2026.

What are the technical amendments?

The draft legislation introduced into Parliament includes some technical amendments that need to be explained and considered further, in particular:

• The CGT adjustment, providing a market value uplift to the cost base of certain CGT assets in certain circumstances.
• The higher of the opening or closing total superannuation balance (TSB) will be used to test whether the $3 million threshold is exceeded to trigger the Division 296 rules after the first year.
• The availability of the exemption for applying the Division 296 rules to deceased members has been restricted further.

We will consider each amendment separately below.

CGT adjustments to cost base of certain CGT assets

The transitional provisions of the draft legislation allow a member to make an election to reset the cost base of certain CGT assets held on 30 June 2026 to be equal to the market value of the asset on that date.  The due date for making this election will be the due date for the 2027 fund income tax return.

We note this CGT adjustment will be for Division 296 purposes only. The CGT adjustment will not be applied for fund income tax purposes, where the current CGT cost base of the asset will be used for calculating any capital gains on the actual disposal of an asset.

The election must be made for all CGT assets and will not be applied on an asset-by-asset basis.  This may cause some unintended consequences for any CGT assets that have dropped in value, where the market value is now less than the cost base as at 30 June 2026.

We hope this amendment will be re-considered further before the legislation is finalised and we believe this CGT adjustment may be better applied as “the greater of the CGT asset’s cost base or market value”.

What assets can the CGT adjustment be applied to?

The CGT adjustment (for Division 296 purposes) can only be applied to assets directly owned by the super fund (ie. real property, units in unit trusts or shares in a companies). The CGT adjustment cannot be applied to indirect assets (ie. real property held by unit trusts or companies).

Should the legislation remain unchanged, then consideration may need to be given as to the timing of any planned disposal of the underlying indirect assets of unit trusts and companies that are owned by the superfund, and may present other planning opportunities.

Higher of opening or closing TSB used to test $3 million threshold, after the first year

The draft legislation provides that a member will be subject to the Division 296 rules if their TSB is greater than $3 million at the end of the financial year or at the start of the financial year.

Consequently, a member who has an opening balance of $3 million or more at the start of a financial year could not avoid Division 296 in that year by reducing their TSB by the end of the year. This was possible under the previous draft version of Division 296 rules.

Furthermore, members with an account balance that declines during the income year, ending with a TSB below $3 million as at 30 June, could still receive a Division 296 tax liability even though they have less than $3 million in super.  This appears to be an unfair outcome.

There is one exception to this amendment within the transitional provisions of the draft legislation for the 2026-27 year, where only the closing balance will be measured (not the opening balance).

This means that for members who do not want to trigger Division 296 tax will have until 30 June 2027 to reduce their TSB super balances below $3 million, giving all members more time to work out whether (and to what extent) they wish to withdraw super benefits before the first Division 296 tax assessments are issued.  This may also have an impact on the timing of the disposal of underlying indirect assets owned by unit trusts and companies that do not benefit from the CGT adjustment (ie. market value reset) noted above.

Exemption for deceased members has been restricted

The draft legislation provides that Division 296 can be applied to a member in the year of their death.

Only their opening TSB will be considered in relation to testing the $3 million threshold for applying the Division 296 rules, as it was considered too onerous on the super fund to calculate the deceased member’s TSB at their date of death (to be used as a closing balance).

From 1 July 2027 onwards, deceased members will be subject to the Division 296 rules, even where their superannuation balance has been fully administered and distributed to their beneficiaries before an assessment is issued.

This amendment is particularly unfair applying a Division 296 liability on the executor of the deceased’s estate after their estate has been fully administered and estate assets distributed, imposing a detriment to the estate beneficiaries. In certain circumstances, the executor may even become personally liable to pay an outstanding Division 296 assessment.

Additionally, executors/administrators will be imposed a further administrative burden to consider possible Division 296 liabilities when they may not have access to the super fund information of the deceased member.

Furthermore, there may be circumstances where a married couple have managed their super balances to the exclusion of the Division 296 rules and following the death of a spouse, the surviving partner will be automatically drawn into the rules even if both were in the pension phase.

For example, consider a married couple with pensions of $2.5 million each (made possible under previously allowed caps and their balances experiencing growth for the last 10 years). At this stage both members would not need to consider the implications of the Division 296 rules. If one member dies during the 2027-28 income year, their pension will automatically revert to the surviving spouse. At the end of that year, the surviving spouse has a TSB of $5 million (or more) and they will subject to a Division 296 liability for the first time, with 40% (being the proportion = ($5M - $3M) / $5M) of any income or gains for the 2027-28 income year subject to tax at a 30% rate. This appears to be an unfair outcome for members who have been managing their super affairs in line with the rules.

We hope this amendment will be re-considered in detail before the legislation is finalised as super industry experts have already began voicing their concerns about the potential disproportionate tax burden that may be imposed on deceased estates and surviving spouses.

Reconsidering questions raised in earlier Tax Alerts

How will the new changes apply to capital gains on long-held shares and property?

The following example from the Explanatory Memorandum of the draft legislation provides a helpful illustrative answer to this question.

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 income 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.

Will capital gains accrued before Division 296 comes into effect on 1 July 2026 be subject to the announced higher rates (ie. 15% and/or $10%) when those CGT assets are sold in the future?

For Division 296 purposes, the CGT adjustment explained above will not include the accrued (or unrealised) gains before 1 July 2026 when calculating any Division 296 liability.

However, for fund income tax purposes, if a CGT asset is sold the normal cost base (ie. purchase price plus improvements etc.) will be used to calculate any capital gain before the one-third CGT discount is applied (to assets held for more than 12 months).



How will the new changes impact the current CGT general discount available to superannuation funds on the sale of CGT assets, will the effective tax rate on capital gains go from 10% (currently) up to 20% (based on combined 30% rate) or even 27% (based on combined 40% rate)?

We have not seen any specific commentary on this issue as part of the draft legislation being introduced, and we will watch this space to see if the draft regulations will provide an answer.

So where are we now?

The final details of the legislation will need to be included in tax regulations, which have yet to be drafted and released, and we wait with anticipation for the draft legislation to pass through both Houses of Parliament and draft regulations being released as soon as possible.

In other words, considering 30 June 2026 is only 4 ½ months away, there are numerous technical issues to be addressed before the Division 296 rules are finalised.

We will continue to watch this space and provide regular updates as new information becomes available.