The proposed Division 296 rules introduce a significant new tax for individuals with high superannuation balances. As part of the transition, eligible SMSFs may elect to reset the cost base of CGT assets held at 30 June 2026 to their market value for Division 296 purposes.
While this election can reduce future Division 296 tax exposure, it is not automatically beneficial. Trustees should assess each asset individually before making what is ultimately a fund-level decision.
Understanding the CGT Cost-Base Adjustment
The transitional cost-base adjustment allows eligible SMSFs to reset the value of assets held at 30 June 2026 to their market value, effectively excluding pre-1 July 2026 capital growth from future Division 296 calculations.
For example, if a property purchased for $500,000 is worth $900,000 on 30 June 2026, the election resets the Division 296 cost base to $900,000. If the property is later sold for $1 million, only the post-2026 growth of $100,000 is considered for Division 296 purposes.
Importantly, this adjustment does not change the asset’s ordinary CGT cost base.
Why an Asset-by-Asset Review Matters
Many trustees may focus on the fund’s total unrealised gains and assume the election is beneficial. However, that approach can be misleading.
Different assets may have very different characteristics:
- Some may have substantial unrealised gains and strong future growth prospects.
- Others may currently be in loss positions but have potential to recover.
- Certain investments may be sold soon, while others are intended to be held long term.
Because the election applies to all eligible assets, trustees cannot choose only the investments that have performed well.
A Common Pitfall
Consider an SMSF that holds:
- Property with a $400,000 unrealised gain
- Listed shares with a $150,000 unrealised gain
- Other investments showing unrealised losses
Although the portfolio shows a strong overall gain, resetting the cost base of loss-making assets may create less favourable outcomes if those assets recover in the future.
This is why looking only at the fund’s overall position can lead to incorrect conclusions.
When the Election May Be Beneficial
The cost-base adjustment may be attractive where:
- The fund holds assets with significant unrealised capital gains.
- Investments are expected to continue appreciating.
- Members are likely to remain above the Division 296 thresholds.
- Significant capital gains may be realised in future years.
When Additional Analysis Is Needed
Trustees should proceed carefully where:
- Assets have substantial unrealised losses.
- Loss-making investments may recover in value.
- Members are unlikely to exceed the Division 296 thresholds.
- Retirement, rollovers, benefit payments or portfolio restructures are expected.
Key Actions for Trustees
Before making the election, trustees should:
- Obtain reliable market valuations as at 30 June 2026.
- Review the original cost base of every eligible CGT asset.
- Calculate unrealised gains and losses on an asset-by-asset basis.
- Consider future growth and recovery prospects.
- Understand that the election is an all-or-nothing decision.
- Maintain appropriate records and supporting documentation.
- Be aware that the election is expected to be irrevocable once made.
The Division 296 CGT cost-base adjustment can provide valuable tax benefits, but it should not be assessed solely at the fund level.
Because every investment has different historical performance and future potential, trustees should undertake a detailed asset-by-asset review before deciding whether to make the election.
The key takeaway: a fund-level election requires asset-level analysis. Understanding the position and future prospects of every asset is essential to making an informed Division 296 decision.
Disclaimer: This article is general information only and does not constitute tax, financial or legal advice. SMSF trustees should seek professional advice before making any Division 296 cost-base adjustment election.
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Credits
Sundaram Shanmugam, Smart SMSF Team
