Division 296 Tax on Superannuation: What SMSF Property Owners Need to Know

By Mike Wilczynski, Certified Property Valuer and Chartered Accountant · Updated September 2026

Division 296 is now law. The Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2025 passed both houses of Parliament on 10 March 2026, introducing an additional tax on superannuation earnings for members with balances above $3 million. The tax commences from 1 July 2026, with the first assessments applying to the 2026/27 financial year.

For SMSF trustees who hold property, Division 296 has created one of the most consequential valuation dates in SMSF history. The market value established as at 30 June 2026 is not just another annual compliance number. It is the foundation of your Division 296 cost base reset election, and it will determine how much of any future capital gain on that property is caught by the new tax. This is a once-off election. It cannot be changed later.

This guide explains how Division 296 works, what changed from the original proposal, how the cost base reset election works for property-holding SMSFs, what the ATO will expect from your 30 June 2026 valuation, and what to do if the fund does not yet hold one.

What is Division 296?

Division 296 is a personal tax assessed to the individual member, not the superannuation fund. It applies an additional tax on the proportion of a member’s superannuation earnings that relate to balances above certain thresholds. It sits on top of the existing 15% tax that super funds already pay on earnings. The tax applies regardless of whether the member is in an SMSF, industry fund, retail fund, or any other type of superannuation fund.

The Division 296 thresholds and rates

Total Super Balance	Additional Div 296 Rate	Combined Effective Rate
Below $3 million	Nil	15% (fund tax only)
$3 million to $10 million	Additional 15%	Up to 30%
Above $10 million	Additional 25%	Up to 40%

Both thresholds are indexed annually to CPI, increasing in $150,000 and $500,000 increments respectively. This indexation, which was not part of the original 2023 proposal, ensures the thresholds maintain their real value over time and prevents bracket creep from pulling more members into the tax.

The key change: unrealised gains are no longer taxed

The original Division 296 proposal, announced in February 2023, would have taxed unrealised capital gains, meaning members would have paid tax on increases in the paper value of their assets even if those assets had not been sold. This was the most controversial aspect of the original bill and generated significant opposition from the SMSF sector, particularly from trustees holding illiquid assets like property.

The final legislation, as revised in October 2025 and passed in March 2026, removes unrealised gains from the Division 296 tax calculation entirely. Division 296 earnings are now based on realised earnings only: dividends, interest, rental income, and realised capital gains.

Under the original proposal, an SMSF holding a commercial property that increased in value by $200,000 on paper would have been assessed on that unrealised gain, even though the fund had not sold the property and had no cash from the gain. Under the final legislation, that unrealised gain is not included in the Division 296 calculation. Only when the property is eventually sold and a capital gain is realised does it enter the Division 296 earnings calculation.

How Division 296 is calculated

The Division 296 tax is calculated in three steps:

Step 1: Determine whether the member’s Total Superannuation Balance (TSB) exceeds the threshold. TSB is measured at both the start and end of each financial year, and the higher of the two figures is used to determine whether the member is “in or out” of Division 296. For the transitional first year (2026/27), only the 30 June 2027 balance is used.

Step 2: Calculate the proportion above the threshold. This is the percentage of the member’s TSB that exceeds the relevant threshold. For example, a member with a $4.5 million TSB has 33.33% above $3 million ($1.5m / $4.5m).

Step 3: Apply the proportion to realised earnings and tax at the relevant rate. The fund calculates the member’s share of realised earnings (rental income, dividends, interest, and realised capital gains), and the Division 296 tax is applied to the proportion of those earnings that relates to the balance above the threshold.

Worked example

Megan has a TSB of $4.5 million at 30 June 2027. Her SMSF earned $500,000 in realised earnings during 2026/27 (including rent from a commercial property, dividends from shares, and a realised capital gain on a share sale).

Step	Calculation	Result
Proportion above $3m	$1.5m / $4.5m	33.33%
Earnings subject to Div 296	33.33% x $500,000	$166,650
Div 296 tax (additional 15%)	15% x $166,650	$24,998

Megan’s Division 296 tax liability is approximately $25,000 for the year. This is in addition to the 15% fund-level tax her SMSF already pays on its earnings. Her effective tax rate on the earnings above $3m is 30% (15% fund tax + 15% Division 296).

How Division 296 earnings are calculated for SMSFs

For SMSFs, Division 296 earnings are not the same as the fund’s taxable income. The calculation starts with the fund’s taxable income and makes several adjustments:

• Assessable contributions are deducted (contributions are not “earnings”)
• Non-arm’s length income (NALI) is deducted
• Exempt current pension income (ECPI) is added back
• Ordinary taxable capital gains are deducted and replaced with adjusted taxable capital gains (using the Division 296 cost base, explained below)

The result is an earnings figure that captures the fund’s investment returns, including rent, dividends, interest, and realised capital gains, but excludes contributions and NALI. This earnings amount is then attributed to individual members (which for most SMSFs with one or two members is straightforward, but for multi-member funds requires a “fair and reasonable” allocation).

The 30 June 2026 cost base reset: the most important election for property-holding SMSFs

SMSF trustees can make a once-off, irrevocable election to reset the cost base of all directly held assets to their market value as at 30 June 2026, for Division 296 purposes only. This means capital gains that accrued before 1 July 2026 are effectively excluded from Division 296 calculations when those assets are eventually sold.

How it works in practice

If you bought a commercial property in 2010 for $500,000 and it is worth $1,200,000 at 30 June 2026, the cost base reset protects $700,000 of pre-commencement gain from Division 296 tax. If that property is later sold for $1,600,000, only the $400,000 gain above the reset value ($1,600,000 minus $1,200,000) enters the Division 296 earnings calculation. Without the election, the full $1,100,000 gain ($1,600,000 minus $500,000) would be included.

At the Division 296 rate of 15% on the proportion above $3 million, this difference can be worth tens of thousands of dollars. The valuation you obtain as at 30 June 2026 directly determines the size of this protection.

It is all-or-nothing

If you elect the cost base reset, the cost base of every directly held asset in the fund is reset to its 30 June 2026 market value. You cannot cherry-pick individual assets. If the fund holds a commercial property with $500,000 of unrealised gain and a share portfolio with $200,000 of unrealised losses, both are reset. The share portfolio’s Division 296 cost base goes up (locking in the loss position), while the property’s Division 296 cost base goes up (protecting the gain).

This means you need to assess the net position across all fund assets before deciding whether to elect. For most property-heavy SMSFs, the election will be beneficial because property typically has the largest accumulated gains. But your accountant should model it before you commit.

It is irrevocable

Once the election is made, it cannot be undone. If property values subsequently fall below the reset cost base, the Division 296 cost base remains at the 30 June 2026 figure. This could result in a smaller Division 296 capital gain (or a Division 296 loss that can be carried forward), but the election itself cannot be reversed.

The deadline is the 2026/27 tax return

The election must be lodged with the ATO using an approved form by the due date of the fund’s 2026/27 income tax return. For most SMSFs lodging through a tax agent, this is 15 May 2028. However, the fund’s 2025/26 return must be lodged on time first, as delays can cascade. The valuation evidence supporting the election should be prepared as at 30 June 2026 or as close to that date as practicable.

It only affects Division 296 calculations

The cost base reset does not change the fund’s normal tax position. When the property is sold, the fund still pays standard CGT calculated on the original cost base (the actual purchase price plus improvements). The reset only applies to the separate Division 296 earnings calculation. In effect, the fund calculates capital gains twice: once for normal fund-level tax, and once for Division 296 using the reset cost base.

Who should elect the cost base reset?

Members above $3 million now: Electing is almost always beneficial. The reset protects pre-commencement gains from Division 296 when the property is eventually sold. The cost of the election is zero (it is a lodgement with the tax return), and the only downside is locking in the cost base for assets currently in a loss position.

Members below $3 million now: The election is still available and can protect you if your balance grows above the threshold in future years. If your fund holds a property worth $800,000 that was purchased for $400,000, and your total super balance is currently $2.5 million, the $400,000 of unrealised gain will push you toward the threshold as it accumulates. Electing the reset now, while it is free, locks in the 30 June 2026 value. If you never exceed $3 million, the election has no effect. If you do, you are protected.

Funds with property in a loss position: If the property’s current value is below its cost base (for example, purchased for $1.2 million and now worth $1 million), electing the reset locks in the lower Division 296 cost base. This reduces the Division 296 loss available when the property is eventually sold. Whether to elect depends on the net position across all assets in the fund.

What the ATO will expect from your 30 June 2026 valuation

The ATO has signalled that valuation evidence supporting the cost base reset will come under increased scrutiny. This is not a routine annual valuation. It establishes a baseline that will affect Division 296 calculations for the life of every asset in the fund. The valuation must be:

• As at 30 June 2026 (or as close as practicable): A valuation dated March 2026 or September 2026 is less defensible than one prepared as at the exact reset date. Our reports can be prepared with a specific valuation date of 30 June 2026, including retrospectively
• Independent: Prepared by a qualified valuer with no relationship to the fund, its members, or related parties. Self-assessments, kerbside estimates, and council rate notices will not meet the standard for a cost base reset election
• Supported by documented methodology: Comparable sales analysis for residential property, capitalisation of income or direct comparison for commercial property, with the evidence clearly set out in the report
• Covering both market value and rental assessment (for commercial property): If the property is leased to a related party, the rental assessment establishes that the lease is arm’s length, which is a separate compliance requirement the ATO may review alongside the Division 296 election

The indirect property problem

One critical gap in the cost base reset: it only applies to assets held directly by the SMSF. If the fund holds property indirectly through a unit trust or a related company, the cost base reset does not automatically flow through to the underlying property.

Large funds (non-SMSFs) have a separate adjustment mechanism for the first four years (2026/27 to 2029/30), but SMSFs holding indirect property interests do not get this benefit. The reset applies to the units held by the SMSF, not the property held by the trust. The valuation of the units (based on the trust’s net asset value including the property) determines the fund’s Division 296 position.

If your SMSF holds property through a unit trust structure, speak with your accountant about how Division 296 applies to that holding and whether the unit valuation at 30 June 2026 adequately captures the underlying property value for the cost base reset.

What about negative earnings?

If a member’s realised earnings are negative in a given year (for example, due to realised capital losses exceeding income), no Division 296 tax is payable for that year. The negative earnings can be carried forward to offset Division 296 earnings in future years. However, there is no refund of Division 296 tax paid in prior years. The carry-forward only applies against future Division 296 liabilities.

Similarly, if a member’s TSB drops below $3 million, they are not liable for Division 296 tax in that year, but there is no refund of amounts paid in prior years when the balance was above the threshold.

Paying the Division 296 tax

Division 296 tax is assessed to the individual member, not to the fund. Once the ATO issues an assessment, the member has 84 days to pay. Members have the option to request a “release authority” allowing them to withdraw money from their superannuation to pay the tax, even if they have not otherwise met a condition of release.

For members with property-heavy SMSFs, this creates a potential liquidity consideration. If the fund’s earnings are largely composed of rent (which has been received in cash) and the member’s balance is modestly above $3 million, the Division 296 liability may be manageable from cashflow. But if a large capital gain is realised in a single year, for example from selling a property, the Division 296 tax on that gain could be substantial, and the fund needs to have sufficient cash available for the member to withdraw and pay the tax.

Impact on retirement phase (pension) members

Under the existing superannuation tax rules, earnings on assets supporting a retirement phase pension are exempt from fund-level tax (0% tax rate). Division 296 changes this for members above the threshold. Pension phase members with balances above $3 million will now pay Division 296 tax on the proportion of their earnings above the threshold, meaning their effective tax rate moves from 0% to 15% (or 25% for balances above $10 million) on that portion.

For a member in pension phase with a $5 million balance, 40% of their earnings will now attract an additional 15% tax, resulting in an effective Division 296 rate of 6% across their total earnings (compared to 0% previously). A pension commencement valuation establishes the asset values supporting the pension and feeds into both the transfer balance cap and Division 296 calculations.

Timeline: what to do and when

When	Action
Now (March/April 2026)	Discuss the cost base reset with your accountant. Identify all fund assets that will be affected. Order property valuations to be prepared as at 30 June 2026.
May/June 2026	Ensure the fund’s 2025/26 tax return is on track for lodgement. Confirm the valuation date and methodology with your valuation provider.
30 June 2026	Valuation date. All fund assets are measured at market value as at this date.
July 2026 onwards	Division 296 is live. First affected year is 2026/27. The fund’s accountant prepares the annual financial statements using the 30 June 2026 valuations.
By 2026/27 return due date	Lodge the cost base reset election with the ATO using the approved form, supported by valuation evidence.

Strategies to consider now

Withdraw to reduce your TSB below $3 million. If your balance is close to the threshold and you meet a condition of release, withdrawing funds before 30 June 2027 (the first measurement date) can keep you out of Division 296 entirely. However, withdrawn amounts may attract personal tax, and re-contribution is subject to contribution caps, so this decision requires careful modelling by your accountant or adviser.

Obtain professional valuations for all property assets as at 30 June 2026, retrospectively if the fund did not obtain one at the time. This is essential regardless of whether you are above the threshold now. The cost base reset election is available to all SMSFs, and an accurate 30 June 2026 valuation protects you if your balance exceeds $3 million in future years. The valuation also serves as the fund’s annual valuation for financial statements and audit.

Review your fund’s investment strategy. Consider whether the current asset mix is appropriate given the new tax landscape. For some members, it may be more tax-effective to hold certain assets outside super, but this depends on individual marginal tax rates, CGT positions, and estate planning objectives.

Lodge your 2025/26 SMSF tax return on time. The cost base reset election must be lodged by the due date of the fund’s 2026/27 income tax return. Ensure the 2025/26 return is lodged first and on time, as delays can cascade and affect eligibility for the election.

Talk to your accountant. Division 296 interacts with transfer balance caps, total super balance thresholds, contribution caps, pension drawdown rules, and estate planning. The right strategy depends on your specific circumstances.