SMSFs choosing to use the Division 296 tax cost base adjustment may crystalise a capital loss without benefit if trustees cannot match it against a gain under the new impost, DBA Lawyers director William Fettes has pointed out.
He pointed out the cost base adjustment aims to exclude unrealised gains prior to 30 June 2026 from future Division 296 earnings calculations creating a substituted concept of net gains or losses regarding the measure.
Additionally, for other purposes, capital gains tax (CGT) outcomes will remain unchanged. This will create two operating methodologies for one taxation concept of which Fettes noted SMSF members had to be aware.
“Carried forward capital losses, if they exist, will continue to operate normally and have an effect in offsetting fund level CGT outcomes as well as for Division 296 purposes,” Fettes told practioners during a recent technical webinar.
“Where you have a substituted a net capital loss under the Division 296 framework, because of the cost base adjustment, it can’t be carried forward,’ he explained.
“So there is a potential issue here with wasting [a capital loss] if you don’t have a corresponding Division 296 gain to offset [it].
“Clients make their decisions not based on their investment strategy but from a tax optimisation point of view and [that can create] a sub-optimal outcome.”
Fettes illustrated this point with an example where an SMSF acquired an asset for $1.8 million and made a Division 296 cost base adjustment at 30 June 2026 to revalue it at $3.1 million. The fund then sold the asset in January 2028 for $2.8 million.
Subsequently the SMSF’s statutory income would then include a net capital gain of $666,667, based on the $1 million difference between sale and acquisition price and the application of the one-third CGT rule, but this figure would shift completely for the Division 296 position because of the cost base adjustment.
Fettes indicated the adjusted cost base of $3.1 million and the sale proceeds of $2.8 million would result in $300,000 net capital loss for Division 296 purposes.
“That’s fine but if there’s nothing else going on, and this is the key point, we don’t get to carry that loss forward so it does no good without an additional gain to offset against, and that’s why there is a potential sequencing issue as well,” he added.
“If that realisation for the portfolio is the only thing happening we just can live with the lack of optimisation but if there are choices where you want to pair that with another asset in a gain position you would get the benefit of that loss to offset a Division 296 gain.”
Jason Spits
SENIOR JOURNALIST
Jason is a senior journalist with Benchmark Media and writes for the selfmanagedsuper website and magazine and smstrusteenews website. He has covered financial services since 1999 and has written about life insurance, superannuation, investment management and financial advice, in both a freelance and in-house capacity, and also did a brief stint as a media manager for an industry association. He has been the editor of trade titles Money Management and Financial Standard, and was most recently senior journalist with life insurance title Riskinfo.
Articles by Jason