The SMSF Association has highlighted the severe treatment defined benefit pensions will receive under the amended Division 296 tax legislation and the adverse consequences fund members will face when one of these interests is commuted after 1 July 2026.
SMSF Association chief executive Peter Burgess pointed out the approach whereby an actuary determines how earnings are attributed to individual members only applies to account-based interests.
“If there is a defined benefit interest in the SMSF, well then we have to use the formula that was in the old legislation that we hated so much because it was taxing unrealised capital gains. That formula will be used to determine the amount of earnings [generated from] this particular interest,” Burgess told delegates at the SMSF Association National Conference 2026 hosted in Adelaide last month.
“What they have done is they have now added a prescribed factor to the end of that calculation to factor in unrealised capital gains, so they have partly addressed that [issue].
“The problem with this approach, and we’re going to have to wait for the [release of the] regulations to know for sure about this, but you could have a situation where if you commute one of these pensions, well then the way it’s valued, because before it’s commuted it’s based on family law factors, which doesn’t really pick up the reserves of that pension.
“When that pension is commuted, the [associated] reserves get added to a person’s total super balance. So you get an increase, you get an uplift in their total super balance so it could push them above the $3 million [Division 296 tax qualification threshold].”
According to Burgess, if individuals are in scope for the new super tax, the reserves amount allocated from a defined benefit interest will not only count towards their total super balance, it will count as earnings for Division 296 purposes.
He took the opportunity to propose some solutions to this problematic scenario.
“There are a couple of ways to deal with this. First of all if you have got clients in this situation, [have them commute] these pensions before 30 June this year – before Division 296 comes into play,” he suggested.
“Or if you do wait until after 30 June, then you’re best off [asking your clients to commute the pension] and get these proceeds out so you minimise the impact on the individual’s total super balance.
“So this is a technical issue to watch.”
