The revised treatment of deceased SMSF members for the purposes of Division 296 is one of the key changes to the bill recently introduced into parliament and could have a tax impact for some years after a person’s death, DBA Lawyers special counsel Bryce Figot has claimed.
Figot said there has been an important change from the draft Division 296 bill released on 19 December last year compared to the revised bill the government introduced on 11 February and it was the “most critical change” between the two versions of the proposed new impost.
“Under the 19 December draft version, Division 296 could apply even after death, however, under the 11 February bill the new tax work as follows,” he said during an online briefing late last week.
“If you die before 1 July 2027 – no tax. If you die after 30 June 2027, there is only Division 296 tax in the year of death and it is calculated using the total super balance (TSB) at the start of that year.
“To express it technically [from the bill], ‘your total super balance at a particular time is taken to be nil if at that time you have died’.”
He gave an example of Croesus, who has a TSB of $40 million on 1 July 2027 with an SMSF mainly invested in appreciating assets, who then dies in August 2027 and in June 2028 his fund transfers assets to his estate, triggering a $20 million capital gain.
“If we assume the capital gain is eligible for the capital gains tax (CGT) discount, how much is the Division 296 tax?” he said.
“The TSB at the start of the financial year is $40 million and total super earnings (TSE) are $13.3 million.
“If the TSB at a particular point in time is taken to be nil if you have died and Croesus has died, that’s zero, so [Division 296 tax] is $2.85 million.”
He pointed out the change to the bill meant if there were any delays, such as a dispute, which meant the SMSF was unable to transfer assets out until July 2028, the tax bill would be lower, but warned against trying to game this outcome.
“The year that Croesus died in still has a $40 million TSB, but the big difference is that TSE is zero,” he added.
“Since there is a dispute, the fund couldn’t deal with the assets so couldn’t trigger the CGT event and there is nil net capital gain and nil TSE, and when you plug those variables in, the Division 296 tax is nil.
“How much tax would there be in the 2029 financial year if the assets were transferred in that year? The new bill says TSB is nil once you’re dead and while TSE might be $13.3 million, the Division 296 tax is zero.
“Am I suggesting that an SMSF delay triggering CGT until after death? No way. Of course not.
“If someone were to do that, they’d have to contend with promoter penalties plus the more specific laws where SMSFs must cash superannuation death benefits as soon as practicable.”
