The draft Div 296 Regulations have now been released. Most of the text relates to the operation of Div 296 to APRA and defined benefit accounts. For those of us with an interest in SMSFs, the clarification of the treatment of death benefits is the most significant item.
In the first year of operation, the Div 296 tax rate is determined by the total super balance at the end of the year. If a member dies during the year, they will not be subject to Div 296 tax. This has not changed.
The method in subsequent years is a little different to what we had thought. In the 2027/2028 year the member’s total super balance, for Div 296 purposes, is the higher of the member’s total super balance at the beginning (30th June 2027) and the end (30th June 2028) of the year. If the member dies during the year their total super balance drops to nil, so the start of year total super balance determines the Div 296 tax rate applicable to their Div 296 earnings. Div 296 tax is not payable in subsequent years if the death benefit has not been settled by the end of the year of death. All of this has not changed. What has changed is our interpretation. We believed that, if the death benefit payment was not finalised by 30th June 2028, resulting in asset sales being delayed to the 2029 financial year, the earnings attributable to those asset sales would not be subject to Div 296 tax. This is not the case. The Regulations provide for the earnings, including asset sales, that occur in the 2029 year until the death benefit is paid, to be included in the 2028 Div 296 tax return. This effectively negates the “strategy” of dying late in the financial year.
Superannuation trustees may well be encouraged to pay death benefits earlier however, due to the nature of some scenarios involving difficult investments or disputed beneficiaries, the process may not be completed for several years. As Div 296 is payable by the estate, not the super fund, this will only exacerbate the problem that will arise if measures have not been put in place to protect estate beneficiaries from Div 296 tax, particularly where estate and superannuation beneficiaries are not the same individuals.
Note that all this is not relevant to reversionary pensions as they will immediately add to the reversionary beneficiary’s total super balance and earnings from the date of death. This means that they may move an otherwise unaffected reversionary beneficiary into the scope of Div 296 within the year of the primary pensioners death – but this is not new.
I must confess that I am looking forward to producing some interesting modelling tools.
Another item of clarification was the confirmation that a time-weighted average will be applied to a member’s total Div 296 earnings to determine the earnings applicable to each member. This will ensure, for example, that members who are in the fund for only a part of the year are only assessed for a percentage of the fund’s annual earnings. No allowance will be made for different asset allocations between members. An actuarial certificate will be needed to verify this detail unless there is only one member in the SMSF for the whole year.
SMSF trustees can elect to freeze their assets’ cost bases, for Div 296 earnings purposes, at their 30th June 2026 value. This is not new. What we now know is that APRA funds, for which such a measure is impractical, will be able to apply a factor to any capital gain amount included in Div 296 earnings. In 2026/2027 it will be 20%, increasing to 40% in 2027/2028, 60% in 2028/2029 and 80% in 2029/2030. There will be no discount applicable in any future years. This means that in the 2026-27 income year, 20 per cent of the capital gain used for the purpose of working out the fund’s total Division 296 earning is used.
We have a Div 296 FAQ, updated as new information comes to hand. It includes a simple calculator. An additional, much more detailed modelling calculator is currently in production.
If you’d like your customised, remotely updated, version of our Div 296 FAQ to be embedded into your website please let me know.
