SMSF trustees have the opportunity to lessen the impact of the Division 296 measure by adjusting the cost base of portfolio assets. Nicholas Ali indicates the decision to invoke this provision must be given very careful consideration to ensure an optimal outcome is achieved.
The introduction of the Division 296 measure represents a significant shift in Australian superannuation taxation, imposing an additional impost on individuals with large super balances. Effective from 1 July 2026, this legislation targets high net worth individuals by applying extra tax on the investment earnings generated by superannuation balances exceeding specific thresholds. For many SMSFs, particularly those holding assets that have appreciated significantly over time, the potential for substantial future tax liabilities is a major concern. To mitigate these impacts, the legislation includes a transitional provision allowing eligible SMSFs to adjust the cost base of their capital gains tax (CGT) assets.
This adjustment effectively quarantines historical capital gains from the new tax regime, offering a strategic opportunity for wealth preservation. However, this election is complex, irrevocable and must be made on a fund-wide basis, requiring careful consideration of the fund’s entire asset portfolio.
The cost-base adjustment mechanism
Embedded within the Division 296 legislation is a transitional provision that allows eligible SMSFs to adjust the cost base of their CGT assets. This provision is available to any complying SMSF with six or fewer members regardless of whether any member currently has a balance above $3 million. The election allows trustees to treat the market value of their CGT assets as at 30 June 2026 as the new cost base for Division 296 purposes only. This effectively quarantines all capital growth that accrued before 1 July 2026 from future Division 296 earnings calculations.
The adjustment is a one-time opportunity and is made at the fund level. It applies to all CGT assets held directly by the fund on 30 June 2026. Trustees cannot choose individual assets to reset; the election is all or nothing. This means if a fund holds a mix of appreciated and depreciated assets, the effect of the election on the full portfolio must be considered. Assets held through other structures, such as unit trusts or companies, are ineligible for this process and should be considered separately.
The adjustment applies only for Division 296 purposes. When an asset is sold, two separate calculations will now potentially apply: the ordinary CGT calculation, which continues to use the original cost base, and the Division 296 earnings calculation, which uses the adjusted one. The actual cost of the capital assets and investments does not change within the SMSF as normal income tax and CGT principles apply to the taxation of the fund’s income each year. Therefore, trustees must record and retain any reset cost base outside of the ordinary SMSF accounting records. This dual record-keeping adds administrative complexity, but is manageable with proper planning.
Eligibility and election process
To be eligible to use the adjusted taxable capital gains calculation, an SMSF must opt in via the lodgement of an approved form with the ATO. This form must be lodged by the due date of the SMSF’s 2026/27 annual income tax return. The election is irrevocable and missing the deadline is likely to be irreversible. Trustees should act early rather than waiting until the deadline as the decision hinges on knowing the fund’s holdings and their market values as at 30 June 2026.
Before 30 June 2026, trustees should obtain current market valuations for all directly held CGT assets and identify any assets with unrealised losses. The election applies at the fund level so loss assets are captured too. Trustees should also review whether their total super balance is above $3 million, or likely to reach it, as the adjustment only has value if the Division 296 measure applies. It is important to consider multiple outcomes as the election cannot be revoked once made. Seeking professional personal advice is highly recommended before acting on any such assumptions.
The adjustment covers assets owned directly by the fund. Assets held through other structures, such as unit trusts, are treated differently. For example, if an SMSF holds shares in a company, the cost base of the shares can be reset, but the underlying assets of the company cannot. This distinction is important for funds with complex investment structures. Accurate and defensible market valuations will be critical, particularly where the fund holds unlisted or illiquid assets.
Implications for appreciated and depreciated assets
The cost-base adjustment is particularly beneficial for SMSFs holding assets with significant unrealised capital gains. For many, SMSFs assets such as property or shares have been held for a decade or more and carry significant unrealised gains. Without the cost-base adjustment those historical gains will attract Division 296 tax, in addition to regular CGT, when the assets are sold. By adjusting the cost base, only growth from 1 July 2026 onwards will be included in the Division 296 calculation when an asset is eventually sold, potentially resulting in significant tax savings.
Consider an SMSF that purchased a commercial property in 2014 for $1.2 million. By 30 June 2026, that property is worth $2.8 million. The unrealised capital gain is $1.6 million. If the fund elects to make the adjustment, the cost base for Division 296 purposes becomes $2.8 million. When the property is eventually sold for, say, $3.5 million in 2030, the capital gain for Division 296 purposes is only $700,000 ($3.5 million – $2.8 million) rather than $2.3 million ($3.5 million – $1.2 million). If any member of the fund has a total super balance above $3 million in that year, a portion of the $700,000 gain is subject to Division 296 tax rather than the full $2.3 million gain.
However, the all-or-nothing nature of the election presents risks for funds holding assets that have fallen in value. Adjusting a depreciated asset locks in a lower cost base for Division 296 purposes. Any resulting Division 296 loss in the year of sale cannot be carried forward to offset future earnings.
Consider a fund that purchased an asset for $300,000. At 30 June 2026, the asset is worth $200,000. The fund elects the adjustment, locking in a cost base of $200,000 for Division 296 purposes. The $100,000 loss relative to the original purchase price is permanently locked out of the Division 296 calculation and cannot be carried forward or recovered. This is distinct from ordinary capital losses, which may still carry forward under the usual rules.
Strategic considerations and planning
The decision to adjust the cost base hinges on the fund’s overall portfolio performance and future expectations. Trustees should compare the potential tax savings from the adjustment against the potential tax cost of modifying the cost of depreciated assets. The right decision is often about liquidity and timing and not just the headline tax rate. Trustees should also consider whether their total super balance is likely to exceed $3 million in the future as it may be prudent to take advantage of the one-off election and adjust cost bases now even if no member currently exceeds the threshold.
For affected clients, planning considerations should include reviewing projected total super balances and ensuring up-to-date and well-documented valuations, particularly for SMSF assets. Trustees should also understand whether a CGT cost-base adjustment election may be appropriate and compare the alternatives to investing via superannuation.
Comparative examples: adjusting versus not adjusting
Scenario A: The highly appreciated asset (case for adjusting)
Consider an SMSF that purchased a commercial property in 2010 for $1 million. As of 30 June 2026, the property is valued at $2.5 million. The fund elects to adjust the cost base. Five years later, in 2031, the property is sold for $3.2 million.
Without the cost-base adjustment:
If the fund does not elect the adjustment, the entire historical gain is included in the Division 296 earnings calculation.
Original cost base: $1,000,000
Sale price: $3,200,000
Capital gain for Division 296: $2,200,000 ($3,2000,000 – $1,000,000)
Impact:
The full $2.2 million gain is treated as earnings. If the member’s total superannuation balance exceeds $3 million, a proportion of this $2.2 million is subject to the additional 15 per cent Division 296 tax. This effectively taxes capital growth that occurred over 16 years prior to the legislation’s commencement.
With the cost-base adjustment:
By electing to use the adjustment provision, the fund quarantines all pre-1 July 2026 growth.
Adjustment cost base (30 June 2026 value): $2,500,000
Sale price: $3,200,000
Capital gain for Division 296: $700,000 ($3,200,000 – $2,500,000)
Impact:
Only the $700,000 gain accrued after the adjustment date is included in Division 296 earnings. The $1.5 million of historical growth is permanently excluded from the Division 296 tax net.
Tax saving:
On a $2.2 million gain versus a $700,000 gain, the difference in exposed earnings is $1.5 million. For a member fully above the threshold, this represents a potential Division 296 tax saving of up to $225,000 (15 per cent of $1.5 million) on this single asset sale, ignoring the proportional calculation for simplicity.
Scenario B: The depreciated asset (risk of adjusting)
The all-or-nothing nature of the election means assets performing poorly can negate the benefits of adjusting appreciated assets. Consider an SMSF holding a parcel of shares purchased in 2015 for $500,000. Due to market conditions, these shares are valued at only $350,000 as of 30 June 2026.
Without the cost-base adjustment:
Original cost base: $500,000
Hypothetical future sale price: $450,000
Capital loss for Division 296: $50,000 ($450,000 – $500,000)
Impact:
This $50,000 loss cannot be carried forward to offset future Division 296 earnings. The fund retains the ability to use the economic loss relative to the original purchase price, however.
With the cost-base adjustment:
Adjustment cost base: $350,000 (locked in at 30 June 2026 value)
Hypothetical future sale price: $450,000
Capital gain for Division 296: $100,000 ($450,000 – $350,000)
Impact:
The election has converted a potential $50,000 loss into a $100,000 gain for Division 296 purposes. The $150,000 of unrealised loss existing at the adjustment date is permanently extinguished for Division 296 calculations.
The fund now pays extra tax on the recovery of value from $350,000 to $450,000, whereas without the adjustment, it would have paid no extra tax until the value exceeded $500,000.
Strategic implications of the all-or-nothing rule
The most critical constraint of the cost-base adjustment is that it applies to all CGT assets held by the fund. Trustees cannot cherry-pick. This creates a ‘netting’ effect where the benefits from appreciated assets must be weighed against the detriments from depreciated assets.
If a fund has one property with a $2 million unrealised gain, but also holds a share portfolio with a $500,000 unrealised loss, the trustee must calculate the net impact. Adjusting locks in the $500,000 loss as the new base, meaning any recovery up to the original purchase price becomes taxable earnings under Division 296. If the share portfolio is expected to recover significantly, the tax payable on that recovery, due to the adjustment, might partially offset the savings gained from the property adjustment.
In extreme cases, where the portfolio is mixed, a fund might calculate the aggregate tax saving is minimal or negative when factoring in forgoing carry-forward losses on underperforming assets. In such a ‘break-even’ or slightly negative scenario, the administrative burden and the irrevocable nature of the choice might tip the decision towards not adjusting, preserving the flexibility of the original cost bases and the ability to use capital losses naturally as they arise.
Conclusion
The transitional cost-base adjustment is an important consideration for SMSFs facing Division 296 tax, effectively quarantining historical capital growth from future additional taxation. For funds with appreciated assets, this election can yield substantial tax savings by taxing only post-1 July 2026 growth. However, its mandatory all-or-nothing nature means adjusting depreciated assets permanently extinguishes valuable capital losses. Since every SMSF has a unique asset mix and member requirements, there is no one-size-fits-all solution. Trustees must seek specialised professional advice to model specific scenarios before the deadline, ensuring the election aligns with their long-term strategy.
