Div 296 tax payable on indirect assets
Where an SMSF has an interest in a unit trust or company, Div 296 tax will be triggered on the income or gains of assets held by that unit trust or company as follows:
For unit trusts, where the unit trust passes its share of its assessable income to the SMSF unit holder, that assessable income will be included in the member’s “taxable superannuation earnings”
For companies, when the company declares a dividend in favour of the SMSF shareholder, that dividend will be included in the member’s “taxable superannuation earnings”
No CGT adjustment for indirect assets
While a CGT adjustment (for Div 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 (eg assets held by unit trusts or companies).
This is not an inadvertent omission by Treasury, but a deliberate policy decision as outlined in the following comment from the EM:
1.175 For the purposes of the CGT adjustment for small superannuation funds, it intends to capture CGT assets of a small superannuation fund to which section 104-5 of the ITAA 1997 results in an income tax consequence for the small superannuation fund. It does not apply to indirectly held interests of a small superannuation fund , apart from where an existing income tax look through applies where a CGT event occurs (such as assets held on trust as part of a limited recourse borrowing arrangement as covered by section 235-840 of the ITAA 1997). For example, if a small superannuation fund owns units in a unit trust and the trustee of that unit trust owns real estate, the fund can adjust the cost base of the units it owns in the unit trust, but it cannot adjust the cost base of the real estate held by the unit trust.
So why is this a problem?
Both the former and proposed Div 296 tax regimes were not supposed to apply to pre-commencement benefits. While the CGT adjustment will achieve that for directly held assets, it won’t assist with indirect assets.
The following example shows why:
Example
AB SMSF holds 100% of the units in a pre-99 unit trust. The unit trust holds two properties (property A with a cost base of $500K and a market value of $2 million at 1 July 2026 and property B with a cost base of $1 million and a market value of $1.5 million).
There is one member who has $4 million in benefits on 1 July 2026 and is not in pension phase.
The units in the unit trust have a cost base of $1.5 million. For Div 296 the cost base for those units is reset to $3.5 million on 1 July 2026.
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 (which pays tax of $200K after the discount).
The member’s taxable superannuation earnings are say $2.5 million. 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 reference amount is say $5 million.
The member’s Div 296 tax assessment is ($5M - $3M)/$5M) x $2.5M x 15% = $150K.
That is, the member has paid Div 296 tax on the full gain of property A (ie $2 million) rather than the gain from 1 July 2026 onwards (ie $500K).
What options are available to SMSFs with indirect assets?
Firstly, it should be noted that the draft legislation has not yet been finalised, let alone passed by parliament.
It is therefore recommended, unless there are other reasons to do so, that no action be taken until the new law is passed.
In addition, the below options are just considering this issue from a Div 296 point of view. For any of the options a holistic examination of all issues should be considered such as SMSF tax, transfer (stamp) duty, tax issues in the new structure (if assets are moved outside of super), GST, super death benefits tax, estate planning, etc.
Dispose of indirect assets prior to 1 July 2026
If indirect assets are disposed of prior to 1 July 2026 and the income distributed to the SMSF (eg via a unit trust distribution or company dividend), then the gains from the sale of those indirect assets will not be caught by Div 296.
Collapse a structure before 30 June 2026
If a unit trust or company is collapsed prior to 30 June 2026 and the asset is transferred to the SMSF, then the SMSF will receive a cost base adjustment at the time of receipt and at 30 June 2026. Therefore, a future disposal of that asset by the SMSF will only trigger Div 296 on the increase in value from 1 July 2026 onwards.
Reduce member benefits below $3 million prior to 30 June 2027
If a member has less than $3 million on 30 June 2027, then Div 296 would not apply for the 2026/27 year. This would include that Div 296 would not apply for such a member in relation to gains/distributions/dividends received by the SMSF from the disposal of indirect assets in the 2026/27 year.
Dispose of the units/shares in the same year the indirect asset is sold
If the indirect asset is sold as the SMSF receives the capital gain distribution from a unit trust, as noted above, the CGT adjustment for the units will not assist with reducing the capital gain.
However, if the unit trust was wound up in the same financial year, the CGT adjustment on the units could cause a capital loss which, for Div 296 purposes, could be offset against the capital gain.
This strategy will not work if the indirect asset is held by the unit trust on revenue account or if the indirect asset is held by a company and the SMSF receives a dividend. That is, capital losses cannot be offset against revenue gains/income.
Sell the units or shares before the asset is disposed of
If the SMSF sells the units or shares before the indirect asset is disposed of then the CGT adjustment will be applicable to those units/shares and Div 296 tax will only apply to the increase in value of the units/shares from 1 July 2026.
However, if the units are sold to a related party, and the indirect asset is subsequently sold, the assessable distribution/dividend will be taxed in the hands of the new unit holder. This may result in a higher overall tax liability.
Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E pbroderick@sladen.com.au
Philippa Briglia
Special Counsel
T +61 3 9611 0174 | M +61 449 404 801
E: pbriglia@sladen.com.au
Jan Harnischmacher
Associate
T +61 3 9611 0158
E joh@sladen.com.au
Andrea Lin
Lawyer
T +61 3 9611 0189
E alin@sladen.com.au
This article was originally published on the Sladen Legal website: The new Div 296 draft legislation - Part 3 - the big problem with indirect assets
