Division 296: What Every SMSF Member With a Balance Above $3 Million Needs to Know
Australia’s new $3 million superannuation tax – Division 296 – has been law since 1 July 2026. It applies to any individual whose total superannuation balance (TSB) exceeds $3 million. TSB is a personal, not a fund, measure: it is the sum of a member’s interests across every superannuation fund and account they hold, not just the balance of any one SMSF.
A member who is a member of several funds, or who holds both an SMSF interest and a retail or industry fund account, has all of those interests added together for this purpose. What matters is that combined figure at the relevant test date – not which fund the money sits in and not what any particular fund happens to be invested in.
Pension exemption doesn’t help
Most SMSF trustees are used to thinking of exempt current pension income (ECPI) as the main lever for minimising tax on fund earnings and capital gains. If a fund is fully in pension phase, income and gains can be entirely tax-free at the fund level under the segregated method (s 295-385 ITAA 1997) or substantially exempt under the proportionate method (s 295-390) if an actuary certifies a high exempt percentage.
Division 296 ignores all of this. The legislation expressly disregards the pension exemption when calculating ‘Division 296 fund earnings’ – earnings on pension assets are counted as though no pension exemption applied at all. So income or gains that might be substantially tax-free to the fund itself can still be taxed at the member’s personal level under Division 296. Members who assume a pension-heavy fund structure insulates them from this tax are likely to be surprised.
There is a second, more technical issue here too: many funds with any accumulation-phase balance at all – even a small one – lose access to the segregated method entirely.
Under s 295-387, if a member’s TSB exceeded $1.6 million just before the start of the year and they were a retirement-phase income stream recipient, the fund has ‘disregarded small fund assets’ and must use the proportionate method for the whole year, unless literally all fund assets supported pensions for the entire year.
A fund that is, say, 94% in pension phase and 6% in accumulation phase does not get to treat 94% of its income and gains as automatically exempt – it must run the actuarial proportionate calculation across everything.
The cost-base reset election
The law offers genuine transitional relief. An SMSF can elect to reset the cost base (or reduced cost base) of all its CGT assets to their market value as at the end of 30 June 2026 for Division 296 purposes only. This shelters growth that accrued before Division 296 existed. Where this election is made, then only the increase in value from 1 July 2026 onward is brought into the Division 296 earnings calculation for that asset.
There are two distinct dates involved:
- 30 June 2026 is the valuation date. This is the date at which every CGT asset in the fund needs a defensible market value if the election is to be relied on. For listed securities this is usually straightforward, but for unlisted shares, direct property, or other illiquid assets, a proper valuation exercise – ideally contemporaneous, or at least well-evidenced after the fact – is needed for that specific date.
- The due date of the SMSF’s 2026–27 annual return is the election deadline. The election itself is made in the ATO approved form and lodged with the fund’s 2026–27 return. Because SMSF lodgement due dates vary by circumstance (self-lodging versus using a registered tax agent and whether prior returns were lodged on time), this deadline can fall well into 2028 for many funds – considerably later than the valuation date itself.
The practical point for trustees is simply this: don’t let the later lodgement deadline create false comfort about the valuation task. The values that will ultimately be locked in by the election are frozen as at 30 June 2026, so the valuation work – obtaining evidence, engaging a valuer for anything illiquid and documenting the basis for the figure – is best done with that date squarely in mind, even though the formal election isn’t due until later.
The election is also all-or-nothing: it applies to every CGT asset the fund held at 30 June 2026, not selectively, and once made it cannot be revoked.
What matters most: what your TSB looks like on 30 June 2027
This point is specific to the first year of the tax and needs to be understood on its own terms, because the rule is materially more favourable in that year than in every year after it.
Division 296 liability for the 2026–27 income year – the first year the tax applies – turns solely on the member’s TSB at a single date: 30 June 2027. There is no opening-balance test in that first year. From 2027–28 onward, the position changes: liability is based on the higher of the member’s TSB just before the start of the year or at the end of it, so a member cannot simply rely on a low closing balance each year going forward. The single-date, end-of-year-only test at 30 June 2027 is a one-off feature of the transitional first year and will not recur.
Critically, for that 30 June 2027 test, the amount and timing of withdrawals or contributions during the year have no separate ‘add-back’ effect under the law as enacted. That wasn’t always the design. The original October 2023 exposure draft of the legislation included an explicit anti-avoidance mechanism: an ‘adjusted TSB’ that added back withdrawals made during the year (and subtracted contributions) precisely so that a member couldn’t simply pull money out of super before 30 June to avoid the tax. That add-back was not carried through into the final enacted law. Current ATO guidance is explicit that it doesn’t matter how much was withdrawn from, or contributed to, super during the year – only the TSB at 30 June 2027 itself counts.
The practical consequence for any member sitting above, at, or near the $3 million threshold: if withdrawals – whether a lump sum, a pension payment, or a commutation – bring the member’s TSB below $3 million by 30 June 2027, no Division 296 tax is payable for that first year, regardless of how much income or how large a gain the fund actually realised during the year. This is the single most valuable, and most time-limited, planning opportunity the current law offers – it applies only to the 30 June 2027 test date.
In-specie withdrawals: taking assets out without a cash sale
Where a member is considering withdrawing value from the fund to manage their TSB, it is not always necessary to sell an asset for cash first. Superannuation law allows a lump sum benefit – though not a pension payment – to be satisfied by an in-specie transfer of an asset itself, at market value, directly to the member. There is no restriction on the type of asset that can be transferred out this way to satisfy a lump sum benefit, which makes it a useful option where an asset is illiquid, where a forced cash sale would be commercially undesirable, or where the member simply wants to continue holding the asset personally rather than realise it.
For an in-specie lump sum withdrawal to be available, the usual conditions for any benefit payment still apply: the member must have met a superannuation condition of release (for example, reaching preservation age and retiring or reaching age 65) and the payment must be structured and documented as a lump sum and not as an income stream. The transfer must be effected at genuine market value, using the appropriate mechanism for the asset type – for example, an off-market transfer form for listed securities or a contract of sale showing the member as purchaser for real property or other assets.
Two things to note if this route is being considered as part of TSB management before a 30 June test date. First, the transfer itself – not merely a resolution or intention to make it – needs to be complete and properly documented by that date, for the same reason a cash withdrawal needs to actually leave the fund by then. Second, an in-specie transfer of an asset out of the fund is itself a CGT event for the fund, so the fund-level tax consequences of the transfer (including any interaction with ECPI and the cost-base reset election discussed above) need to be worked through, not just the effect on the member’s TSB.
Partial commutation of a pension as a further route to the same result
Where a member’s benefit is already in pension phase, a lump sum need not come from a fresh accumulation withdrawal at all – it can instead be taken as a partial commutation of the existing pension.
A partial commutation converts part of the capital supporting the pension back into a lump sum, which can then be paid out (in cash or in-specie) or, in some cases, retained in the fund in accumulation phase. Because a commutation lump sum is a lump sum for superannuation law purposes, the same in-specie payment option discussed above is available for it.
A partial commutation has two effects worth keeping separate.
First, if the resulting lump sum is paid out of the fund, it reduces the member’s TSB in exactly the same way as any other withdrawal, for the same reasons discussed above – no add-back applies under the enacted law.
Second, commuting part of a pension will also reduce the member’s transfer balance account, freeing up transfer balance cap space that may be useful for other purposes (for example, if the member later wants to commence a new pension with different capital).
For a member who is already substantially or fully in pension phase – as is common for older members with a long-established SMSF – a partial commutation is often the most natural mechanism for extracting a lump sum before a 30 June test date, rather than needing to first commute the whole pension or draw down an accumulation balance that may not exist or may be small.
Example: a fund selling an asset before 30 June 2027
The interaction of these rules is best illustrated with a concrete example. Assume a member’s account is split 6.05% accumulation and 93.95% pension (an actuarially certified proportion, for illustration), their fund’s TSB is currently around $4,700,000, and the fund sells an asset in the 2027 income year for $5,000,000 on a nominal cost base.
Fund-level tax. Using the proportionate method, only the 6.05% accumulation-phase proportion of the gain is taxable to the fund; the balance is exempt current pension income. After the one-third CGT discount, the taxable gain is reduced to roughly $201,700, taxed at 15%, giving fund tax of approximately $30,250.
Division 296, if proceeds remain in the fund. Division 296 disregards both the ECPI exemption and the CGT discount – the full $5,000,000 gain is relevant fund earnings, apportioned by the member’s TSB. If the proceeds stay in the fund and the member’s TSB is around $6,500,000 at the 30 June 2027 test date, Division 296 tax is approximately $403,846. Combined with the fund tax, total tax is approximately $434,096 – about 8.7% of the gain.
Division 296, if proceeds are withdrawn (by lump sum, in-specie transfer, or pension commutation) before 30 June 2027. If the member withdraws enough of the proceeds and any other amount necessary so that their TSB is below $3,000,000 at the test date, no Division 296 tax is payable at all. Combined tax is then just the $30,250 fund-level tax – about 0.6% of the gain. The difference between the two outcomes – roughly $403,846 on this illustrative gain – turns entirely on whether the withdrawal actually settles and is paid out before 30 June 2027 and on getting under the $3 million threshold.
These figures are illustrative only. The actual outcome for any fund depends on its actual cost base, its actuarially certified exempt percentage for the year and the member’s TSB across all superannuation interests, not just the one fund.
Comparative tax: does moving assets out of super actually help?
Before treating ‘get below $3 million’ as an automatic win, it’s worth asking what happens to the money or asset once it leaves the fund, compared with what the combined tax cost would have been if it stayed.
Superannuation is a concessionally taxed environment and Division 296 only erodes part of that concession – it does not automatically follow that holding assets outside super, say in a private company, is better once both the fund’s own tax and Division 296 are added together.
The right comparison is not company tax against fund tax alone or company tax against Division 296 alone – it is company tax against the sum of fund-level tax and Division 296 tax that would otherwise apply to the same gain.
On the illustrative $5,000,000 sale used above, with the fund’s actual ECPI position (94% pension-exempt), the combined super tax is a clear win over company tax at every TSB level modelled – even at a TSB of $50,000,000 the combined figure is only around $1,135,250 (about 22.7% of the gain), against a flat $1,500,000 (30%) if the same gain were instead taxed in a company.
A high ECPI percentage does most of the work here because it shelters most of the gain from tax at the fund level in the first place, and Division 296 – even at the 25% rate above $10 million TSB – is only ever levied on the earnings apportioned to the amount of TSB above the relevant threshold, not the whole gain.
The comparison looks materially different for a fund with little or no pension-phase exemption available – for example, a fund that is still substantially in accumulation phase or one that has already withdrawn most of its pension capital before the sale (which would help the Division 296 test but simultaneously reduce the ECPI benefit at fund level).
Modelling the same $5,000,000 gain with no ECPI exemption at all (full accumulation phase, but still with the CGT discount available to the fund), combined super tax rises to roughly $500,000 in fund tax alone before Division 296 is even added, and the combined figure approaches company tax rates as TSB rises: broadly on par with a 25% base rate entity company tax at a TSB in the region of $18 million to $20 million, and approaching a 30% standard company rate at a TSB in the region of $30 million and above.
Company tax has no equivalent to the CGT discount, which is part of why super tends to stay ahead even at higher TSB levels, but the margin narrows sharply once the fund’s own ECPI shelter is reduced or removed.
The practical implication: the fund’s actual, actuarially certified exempt percentage for the relevant year is the single biggest driver of whether staying in super remains the better outcome even at high TSB levels, or whether the combined super tax burden closes in on – or in a low-ECPI, very-high-TSB scenario, potentially exceeds – company tax rates. This is a calculation that needs to be run on the fund’s real numbers for the relevant year, not assumed from a rule of thumb.
Where a genuine benefit may arise is at death. Superannuation death benefits paid to a “non-dependant” for tax purposes (broadly, an adult child not in an interdependency relationship with the deceased) are subject to tax on the taxable component of the benefit, whereas assets held by the member personally or inside a private company are not subject to any equivalent superannuation death benefits tax – the assets or the shares in the company simply form part of the deceased’s estate and pass under the will (subject to ordinary CGT rules on any later disposal by the estate or beneficiaries and any unpaid Division 7A or franking consequences).
For members whose intended beneficiaries are adult children, this may be a genuine, separate reason that can support moving assets out of the concessional but death-benefit-taxed superannuation environment, independent of the Division 296 analysis. This reason is usually limited to where the assets are held by the member personally. But it exposes the income from the assets at marginal tax rates of up to 47%.
You usually want to ensure that the assets are withdrawn very close to death so that significant extra tax is not paid on the income from the assets. Holding the assets in a company is usually not an answer as the value inside the company is not simply cash sitting there tax-paid and ready to hand over – typically it represents retained profits that have already borne company tax at 30% (or 25% for a base rate entity) and to actually get that value out to a beneficiary as spendable cash it generally has to be paid out as a dividend at some point whether before or after death. That dividend is assessable income to whoever receives it, with a credit for the franking attached.
Whether this ends up cheaper than the superannuation death benefits tax then depends entirely on that recipient’s own marginal tax rate.
Other factors that commonly bear on the “keep it in, or take it out” decision include:
- Asset protection. Superannuation benefits generally enjoy strong protection from creditors and in bankruptcy while they remain in the fund, but that protection is reduced or lost once a member reaches preservation age and becomes entitled to access their benefits – at that point the benefit can typically be reached in ways it could not before, even without a withdrawal actually being made. For a member already past preservation age, this consideration carries less weight than it would for a younger member, since much of the protection value has already diminished.
- Contribution caps and re-entry. Money withdrawn from super cannot simply be put back in without using available contribution caps (concessional, non-concessional, or any relevant bring-forward or downsizer provisions), so a withdrawal decision can be effectively one-way for a long period.
- Income tax on pension drawdowns versus fund earnings. Pension payments to a member over 60 are generally tax-free in the member’s hands, whereas franked or unfranked distributions from a company or investment income earned personally are taxed at the individual’s marginal rate (with a credit for any franking).
- Estate planning flexibility and control. A private company can allow more flexible succession planning (for example, via share structuring, family trusts as shareholders or shareholder agreements) than superannuation death benefit nomination rules permit, though this needs to be weighed against the loss of the concessional super environment during the member’s lifetime.
- Division 7A and retained profits. If a company is used, retained after-tax profits that are later distributed will typically carry further tax consequences for the recipient (subject to franking credits), and loans from the company to shareholders or associates are subject to Division 7A, which can create its own compliance and tax traps.
None of this means withdrawing from super is the wrong answer. The point is that the decision should be made by comparing the whole picture – Division 296 exposure, ongoing tax rates in and out of super, death benefits tax, asset protection and re-contribution constraints – rather than by looking at the Division 296 saving in isolation.
The timing issue
Any strategy involving withdrawals – cash or in-specie – to manage TSB depends on the benefit actually leaving the fund before the relevant test date, not merely a decision or a contract by then.
If a sale settles late, a pension payment or in-specie transfer processes late or value otherwise remains sitting in the fund past 30 June, the protection is lost. From the second year of the regime onward, the higher of the opening or closing balance is used, which means a large balance sitting in the fund even briefly at the start of a year can still be caught, even if it’s withdrawn later that same year.
For any transaction or drawdown of significance near 30 June, the mechanics of getting cash or benefits paid out in time are not trivial – they typically involve settlement or realisation (or valuation, for an in-specie transfer), an actuarial certificate for the year, formal trustee resolutions authorising payment of a benefit and the administrative steps of processing a lump sum or pension commutation.
Members and trustees should build in real buffer time rather than aim to finalise transactions or payments in the final weeks of the financial year.
Summary
Division 296 planning is relevant to every SMSF member with a TSB above $3 million. Five things matter:
- The fund’s own pension exemption does not carry across to protect the member from Division 296 – they are entirely separate calculations.
- For the cost-base reset election, keep the two dates straight: 30 June 2026 is the valuation date that fixes the numbers, while the due date of the 2026–27 annual return is simply when the election itself must be lodged – a later, separate deadline.
- What ultimately matters most for most members in this first year of Division 296 is the TSB figure at 30 June 2027 and the timing of any withdrawals – whether a straight lump sum, an in-specie transfer, or a partial pension commutation – relative to that date.
- Before withdrawing assets to reduce TSB, run the real numbers: compare company tax against the combined fund-level tax and Division 296 tax that would otherwise apply, not against either one alone. A fund with a high exempt pension percentage can stay well ahead of company tax rates even at very high TSB levels; a fund with little or no pension exemption available can see the combined figure close in on, or approach, company tax rates as TSB rises.
- Company tax rates and Division 7A are not the only non-Division-296 consequences of moving assets out of super – death benefits tax exposure for non-dependant beneficiaries, loss of asset protection and contribution-cap constraints on getting money back into super all need to be weighed as part of the same decision.
Every member’s position depends on their own actuarial certificate, the fund’s precise pension/accumulation mix over the relevant year and their TSB across all superannuation interests – not just one fund. Members and trustees at or above the $3 million threshold should model their own numbers with current professional advice well before any relevant 30 June date.
Window is closing
The most valuable planning opportunity is the potential to manage a TSB down before 30 June 2027. This applies only to the first year of the Division 296 tax and will not be available in the same form again.
Between now and 30 June 2027, there are a number of trustee decisions to act on and many of the steps involved (valuations, settlement of any sale, trustee resolutions and processing of lump sum or pension payments) take real time to complete properly.
We recommend reviewing your superannuation position now and again well ahead of 30 June 2027 – the point by which any TSB management strategy must already have been carried out. Waiting until that lodgement date approaches to start the analysis will be too late to act on most of the strategies discussed above.
This article discusses general principles under Division 296 of the Income Tax Assessment Act 1997 and is not advice on any specific fund, member, or transaction. Figures and scenarios discussed are illustrative only.
