When Parliament returns on 2 March, the super sector will be looking out to see what happens with Division 296 tax. The version of the legislation to be debated is slightly different to Treasury’s original draft. The main change for SMSF members is a revised approach when a member dies but there were also some other useful “tidy up” changes.
The new version of the legislation specifically sets total super balance to $nil on death. That’s really important because it means – no matter what’s happened to the deceased’s super – it’s not racking up new Division 296 tax bills for years after death. The previous draft legislation treated a deceased member’s super balance as continuing until it had been paid out to someone.
There will still potentially be one final Division 296 tax bill in the year of death because it is based on the higher of a member’s total super balance at the start and end of the year. Obviously the deceased still had super at the start of the year of death.
Interestingly, since Division 296 tax is a personal tax, this bill would belong to the deceased’s estate even if none of the super was paid to the estate. This will create some interesting arguments!
It’s highly relevant in SMSFs because death will also often be a time when large capital gains are realised. Members impacted by this tax obviously have more than $2m in super and therefore generally leave behind way more than their spouse can take as a pension. Inevitably this forces money out of super. Interestingly the change in approach now means funds could theoretically delay paying that balance out (and realising capital gains to do so) until the financial year after death. At that time, at least the deceased would escape Division 296 tax.
We expect the ATO will focus much harder on the requirement to pay out benefits “as soon as practicable” – watching for exactly that type of delay. It will now have a real revenue impact.
Note – there’s been some confusion over whether 2026/27 is any different to later years when it comes to death. The previous draft legislation specifically flagged that anyone who died 29 June 2027 or earlier would not be subject to Division 296 tax for 2026/27 – although it said nothing about 2027/28 and beyond. So under the original draft even these members would have been caught in the Division 296 tax net if their death benefits took a while to pay out.
There is still a subtle difference between deaths in 2026/27 and later years. Anyone who dies on 30 June 2027 or earlier will never pay Division 296 tax. That’s because for that year only, the tax is only based on total super balance at the end of the year and the new version of the rules mean the deceased’s balance will be $nil at that time in any case.
This is something that was presumably just missed in the original draft. Deferred notional gains are capital gain amounts certain funds are carrying forward from some changes back in 2017. By definition they relate to gains built up before 30 June 2026. They are normally taxed when the asset to which they relate is sold and originally there was no specific mechanism to exclude them from Division 296 tax as well. That’s been fixed – they will be excluded from the Division 296 tax calculations.
This isn’t an issue that will impact SMSFs directly but might be relevant to SMSF members with interests in other funds.
Certain super benefits are specifically excluded when it comes to working out the “earnings” subject to Division 296 tax. (Note – some members are excluded from the legislation entirely but this is a different type of exclusion. The one discussed here just relates to ignoring certain earnings amounts).
The exclusions mostly relate to people who are protected by the Constitution from having extra taxes imposed on their super in specific funds (for example, Judges, in relation to the super provided under the specific Acts that relate to their role). The exclusion should have extended to their spouse receiving a reversionary or death benefit pension after the Judge’s death but this was missed in the first draft – it’s been captured now.
It’s worth highlighting that when amounts are excluded from the earnings calculation, that doesn’t mean this part of someone’s super is ignored entirely. It’s still included in their total super balance so will impact the extent to which their super is over $3m or $10m. In other words, even excluded super can increase the amount of tax paid on earnings from other (non excluded) super.
There were other changes to add explanations, add references to deferred pensions where relevant etc but the above are the main changes.
For more insight into the way in which Division 296 tax will work if passed in its current form, as well as strategic opportunities for clients, join our masterclass on 18/19 March (Heffron - Event: Division 296 Tax Masterclass | March 2026). If you can’t make it, feel free to register and watch the recording at your leisure.