Division 296 tax – draft legislation released

A different approach for the percentage

When working out the proportion of super over a threshold ($3m or $10m), the new draft bases this on the greater of the member’s super balance at the start and end of the year.

Previously it only depended on the balance at the end of the year.

This is a big issue for those hoping to realise gains in a particular year and then withdraw a lot of their super before the end of the year to avoid Division 296 tax. The Government was presumably on to this one!

There is a special transitional rule in 2026/27 – the percentage will be based on the member’s super balance at 30 June 2027 only.

That means people seriously intending to extract a lot of superannuation because they have no intention of ever paying this tax realistically have until 30 June 2027 to do so.

Action needed to capture the 30 June 2026 capital gains relief for SMSFs

This isn’t automatic. Funds wanting to take advantage of the ability to specifically exclude capital gains built up before the tax starts will need to opt in using an “approved form”.

The requirement to opt in is an important one because it comes with a deadline. Back in 2017 when we had a similar requirement for capital gains tax relief, some funds missed out because their accountant didn’t understand what needed to be done to opt in or they simply lodged the return late. The relief is only available to funds that opt in on or before the due date of their 2026/27 tax return.

Note that any SMSF can opt in – even one with no members who have more than $3m in super at 30 June 2026. It might still be attractive to do so if any of the members expect to be over $3m in the future and the fund has already accrued large gains.

The “opt in” happens at a fund level rather than a member or asset level. In other words, funds are either “in or out” of the relief, they don’t get to choose to opt in for some assets but not others (eg assets that are currently in a loss position). It also – curiously – means members who join that same fund in the future will benefit from the opt in if pre-July 2026 assets are eventually sold while they are a member.

Note that opting in to this adjusted cost base doesn’t change anything for the normal fund taxes – funds will still pay tax in the usual way on any gains they realise in the future. It is an adjustment that applies exclusively to the Division 296 tax calculation.

Different CGT relief for large funds

Large funds will adjust the fund’s actual realised capital gains for the first 4 years only (2026/27 – 2029/30) – presumably on the basis that mostly assets are turned over during this timeframe (whereas many SMSFs tend to be “buy and hold” investors). We’ll need the regulations to see exactly how this will work.

Splitting the fund’s Division 296 earnings between members

Once the fund has calculated its “earnings” overall, it will need to split that global amount between members since Division 296 tax is a personal tax calculated at the individual level.

For an SMSF, the precise method will be set out in Regulations (yet to be released) but additional guidance issued by Treasury indicates the regulations will involve relying on a special actuarial certificate. This makes sense in that the style of calculation required is similar to the calculations used for actuarial certificates already in place for many pension funds.

Of course, not all SMSFs with members impacted by Division 296 tax are in pension phase – so some accumulation funds will find they need an actuarial certificate for this purpose for the first time. Hopefully this will be administered in a practical way so that it is not necessary for every single fund to obtain an actuarial certificate “just in case”.

Interestingly, Treasury has specifically highlighted that SMSFs holding specific asset pools for specific members will be required to use the same method as all other funds – effectively ignoring any specific allocations.

Large funds (ie other than SMSFs, small APRA funds) will again use a different approach. They will be required to allocate the Division 296 earnings amount in a “fair and reasonable” way between members.

What's next?

The consultation period for this Bill is short – it ends on 16 January 2026. The Government is obviously keen to get the legislation tabled and passed quickly. They have included some improvements to the Low Income Superannuation Tax Offset (LISTO) in the same Bill – presumably in the hope this will encourage other parties to support it.

At Heffron, we’ll be digesting this Bill further over the coming weeks and looking to update a lot of our web content to highlight our latest observations, ideas and strategies for clients. We will also run webinars and a full masterclass early in the new year.

Register now for our Division 296 Tax Masterclass where we'll cover practical insights on what needs action before 30 June 2026 vs 30 June 2027, and the longer-term strategic implications.