The introduction of the Division 296 tax will force a re-evaluation of traditional SMSF strategies to determine if they are still fit for purpose and can be implemented to deliver optimal outcomes, writes Mary Simmons.

The commencement of the Division 296 tax regime does not mean long-standing SMSF strategies have lost their relevance. Contributions, spouse equalisation, recontribution strategies, pensions, reversionary pensions and binding death benefit nominations remain central to SMSF advice.

What has changed is the testing framework. From 2026/27, SMSF professionals need to assess not only whether a strategy is technically sound, but how it affects a member’s total superannuation balance (TSB) and exposure to Division 296.

TSB is now the central planning measure

The TSB already determines eligibility for key concessions and strategies, including non-concessional contributions and access to bring-forward caps, catch-up concessional contributions, spouse contributions and certain exempt current pension income (ECPI) calculation methods.

From 1 July 2026, TSB also determines whether an individual is within scope of Division 296.

For 2026/27, the key test is the member’s TSB at 30 June 2027. If it is not above $3 million at that time, Division 296 will not apply for 2026/27, even if the member had a higher balance earlier in the year.

This transitional feature means a balance over $3 million on 1 July 2026 should not automatically trigger rushed withdrawals. It is an opportunity to model the likely 30 June 2027 position and test strategies before deciding whether withdrawing benefits is actually necessary.

From 2027/28 onwards, Division 296 exposure will be tested by reference to the higher of a member’s opening and closing TSB for the year, making withdrawals generally less effective as a simple year-end balance management strategy (though it may provide a benefit in future financial years).

Understanding the new TSB definition

The TSB is not just a Division 296 concept. It remains central to contribution eligibility, so it is important to understand how the new definition impacts on your clients’ TSB.

For most SMSF clients with accumulation accounts and account-based pensions, the practical impact is not expected to be material because these interests generally have an identifiable withdrawal value.

The more important changes arise for defined benefit and other non-account-based interests where newly registered regulations prescribe new valuation methods.

Some defined benefit pensions may produce a lower TSB than the former approach linked to the member’s transfer balance account, whereas some defined benefit accumulation interests may produce a higher value or bring into account an interest that previously had a nil TSB value.

While these regulations remain subject to parliamentary disallowance, expected to end on 8 September 2026, there is time to review non-account-based interests before the new valuation methods first affect 30 June 2027 TSB calculations.

For some clients, 2026/27 may be the last opportunity to contribute before the new TSB value causes them to exceed a relevant threshold.

Contributions: still valuable, but not automatic

Division 296 does not mean contributions should not be made. Superannuation may still be the best structure when compared to a client’s marginal tax rate, asset protection needs, retirement strategy and estate planning objectives.

But the old question “How much can we get into super?” is no longer sufficient.

The better question is: Should this amount go into super, for which member and what does it do to the client’s future TSB and Division 296 exposure?

For example, a 68-year-old with a $2.75 million TSB may still make a downsizer contribution or use the small business CGT cap. However, once contributed, those amounts increase the member’s TSB, bringing them within scope of Division 296.

Concessional contributions also need to be reassessed on an after-tax basis. For example, deductible contributions may remain attractive where the personal deduction is valuable, despite future earnings being exposed to Division 296 and Division 293 tax also being imposed on high-income clients.

Equalisation strategies become more important

Spouse equalisation strategies have long been used to improve transfer balance cap access, manage tax components, increase retirement income flexibility and support clients’ estate plans.

Under Division 296, it becomes even more important because the tax is assessed at the individual member level. A couple with $5 million split evenly may have a very different outcome from a couple with the same retirement savings where one member holds $4.5 million and the other $500,000.

Recontribution strategies have often been used to support spouse equalisation objectives, helping rebalance superannuation interests between a couple. In 2026/27, they may also have the effect of reducing a member’s TSB at the first Division 296 test time if benefits are withdrawn before 30 June 2027.

However, care is needed. Earlier ATO commentary accepted recontribution strategies in appropriate circumstances, but that guidance predates Division 296. These strategies must be driven by genuine superannuation objectives and not undertaken primarily for TSB management.

Division 296 may also prompt closer scrutiny of how investment returns are allocated between members. Superannuation Industry (Supervision) (SIS) Regulation 5.03 requires returns to be allocated in a fair and reasonable manner between members and different kinds of benefits, but not necessarily strictly in proportion to member balances. For example, a fund may have segregated asset pools producing different member returns.

Where an SMSF adopts an allocation methodology that has the effect of allocating a greater share of returns to a lower-balance member, the methodology should be prospective, consistent with the trust deed and investment strategy, and properly documented.

30 June 2026 valuations carry more weight

SMSF trustees already need to value fund assets annually at market when preparing the fund’s annual return. In 2026/27, valuation evidence becomes even more important, especially for hard-to-value assets.

The 30 June 2026 valuation may influence future Division 296 outcomes, TSB reporting and whether trustees access the Division 296 capital gains tax (CGT) cost-base adjustment.

This adjustment is not automatic. It requires a trustee election, applies for Division 296 purposes only and does not alter the fund’s ordinary CGT cost base for any asset. Trustees will therefore need records for two cost bases: one for ordinary CGT and one modified cost base for Division 296.

The election is irrevocable and, if made, applies across all of the fund’s relevant CGT assets. Trustees cannot cherry-pick asset by asset. It may benefit funds with large unrealised gains at 30 June 2026, but those with unrealised losses or uncertain disposal plans need closer analysis.

Although the election is not required until the due date for lodgement of the 2026/27 annual return, including any deferred lodgement date, the valuation point remains fixed at 30 June 2026.

Retirement strategies need a Division 296 retest

Division 296 also needs to be built into retirement planning. While any Division 296 liability sits with the member personally, it may be paid by nominating to release amounts from superannuation.

For SMSFs with lumpy assets, business real property or unlisted investments, trustees need to consider whether the fund can meet a release request alongside pension payments, expenses, tax liabilities and future benefit payments without disrupting the client’s broader retirement plans.

Trustees also need safeguards to ensure minimum pension payment obligations are met. Taxation Ruling 2013/5 makes it very clear that where a pension fails to pay the annual minimum pension amount, it ceases for income tax purposes from the start of that year. ECPI will not be restored in a later year unless the pension is commuted and a new income stream commenced.

If a member is already exposed to Division 296, the last thing trustees want is for the fund to also lose ECPI because the minimum pension was not paid.

Death benefit planning needs a Division 296 overlay

Reversionary pensions, binding death benefit nominations and death benefit pensions have traditionally been assessed by reference to certainty, control, transfer balance cap outcomes, tax components, family dynamics and the fund’s governing rules.

These remain essential, but Division 296 overlays two new considerations: How could it apply to the deceased member or their estate and what happens to a beneficiary’s TSB?

For 2026/27, a transitional rule means a member who dies on or before 30 June 2027 will not be liable for Division 296 relating to that year or any subsequent year.

Where a member dies on or after 1 July 2027, Division 296 may still apply for the year of death if their opening TSB exceeds $3 million. Although the member’s TSB is technically nil after death, Division 296 exposure does not necessarily end at that point.

Special rules can continue to attribute post-death fund earnings to the deceased member for Division 296 purposes for as long as their interest remains in the fund. This means any delays encountered in paying the death benefit may result in amended Division 296 assessments for the estate, potentially years after death.

Estate liquidity therefore matters, particularly where the death benefit has been paid to an individual beneficiary, but the Division 296 liability remains with the estate.

The beneficiary’s position also needs to be reviewed.

A reversionary pension may still be appropriate where continuity and certainty are paramount. But where a pension automatically reverts, the recipient becomes entitled to it on death and the value of the pension will be included in their TSB immediately.

For example, spouses with $2.6 million each in pension phase may avoid Division 296 while both are alive. But if one pension automatically reverts to the survivor, their TSB increases immediately, potentially creating Division 296 exposure. A sound succession and transfer balance cap strategy must now also be tested through a Division 296 lens.

A non-reversionary death benefit pension may delay the impact on the beneficiary’s TSB because it does not count until paid as a new death benefit pension. This can provide timing flexibility, subject to the deed, death benefit documents and the requirement to cash benefits as soon as practicable in accordance with SIS Regulation 6.21.

Timing also matters. A death benefit pension commenced later in a financial year will be attributed a smaller share of the fund’s Division 296 earnings than one commenced earlier in the year.

For all SMSF professionals, 2026/27 should be treated as a year for review, modelling and deliberate decision-making. The task is not only to obtain market valuations and identify who may be exposed to Division 296 at 30 June 2027, but to retest familiar SMSF strategies against their impact on TSB, contribution capacity and liquidity, as well as retirement and death benefit outcomes.

In the Division 296 environment, old faithful strategies still have a place, but they should not be applied on autopilot.