SMSFs that hold assets via a unit trust or company will be unable to apply the capital gains tax (CGT) adjustment that will exist for directly held assets under the proposed Division 296 impost, with this exemption being an intended part of the new regime, Sladen Legal principal Phil Broderick has said.
Broderick noted under the legislation currently before parliament, where an SMSF has an interest in a unit trust or company, Division 296 tax will be triggered if the unit trust passes its share of its assessable income to the SMSF unitholder, or the company declares a dividend in favour of the fund shareholder, as those amounts will be included in the member’s taxable superannuation earnings.
“While a CGT adjustment (for Division 296 purposes) is available to direct assets held by SMSFs, including units in unit trusts and shares in companies, the CGT adjustment does not apply to indirect assets, for example, assets held by unit trusts or companies,” he stated on his firm’s website.
“This is not an inadvertent omission by Treasury, but a deliberate policy decision,” he added, pointing to the explanatory memorandum to the legislation as explicitly excluding indirect assets from any CGT adjustments.
He added this was likely to create problems for some SMSFs and markedly increase the Division 296 tax they will pay, and illustrated that via an example of an SMSF with one member that has $4 million in benefits and the fund holds 100 per cent of the units in a pre-1999 unit trust, that in turn holds two properties.
The first of these, property A, has a cost base of $500,000 and a market value of $2 million, and the second, property B, has a cost base of $1 million and a market value of $1.5 million on 1 July 2026, and for Division 296 the cost base for those units is reset from $1.5 million to $3.5 million.
“In August 2027, the unit trust sells property A for $2.5 million. That results in grossed-up assessable income of $2 million for the SMSF. The member’s total superannuation earnings are $2.5 million,” Broderick said.
“The cost base adjustment for the units in the unit trust does not assist because the units are not disposed of or redeemed. The member’s total superannuation balance (TSB) reference amount is $5 million.
“The member’s Division 296 tax assessment is [the member’s TSB of] $5 million minus $3 million [for the lower Division 296 threshold] divided by $5 million times the $2.5 million [earnings figure] x 15 per cent totalling $150,000.
“That is, the member has paid Division 296 tax on the full gain of property A, that is, $2 million, rather than the gain from 1 July 2026 onwards of $500,000.”
