Division 296 – Getting Practical

Looks like we are beyond “if” and moving onto “when” for the unpopular Division 296 tax following Labor’s election win. Only a glimmer of hope remains for meaningful change to the proposal that includes the taxing of unrealised gains. As time ticks by past the original proposed start date of 1 July 2025, there may be some chance of professional bodies, like the SMSF Association, being heard with a possible push out of the start date to 1 July 2026.

Under the current proposals to implement, the new Division 296 tax is set to be rolled out with the same options that exist for Excess Concessional, Excess Non-Concessional and Division 293 assessments.

From our experience in dealing with these existing assessments, let’s look at some of the practical considerations in the lead up to the new Division 296 tax.

When to Lodge the SMSF Annual Return

For SMSFs with member balances over $3m, a new consideration will be what is the right time to lodge the SMSF Annual Return with the Australian Taxation Office (ATO). Many members who will be levied with Division 296 tax will be in pension phase and will be used to lodging their SMSF Annual Return early to obtain their franking credit refund.

For those with balances over $3m, will it make senses for them to now look to push out the lodgement to the final due date in May?

Doing so, will delay the assessment of Division 296 tax.

For example, a Division 296 tax assessment that might otherwise issue in October after the SMSF Annual Return is usually lodged in September, may not issue until June, following the later lodgement in May (some 8 months later).

Choosing who pays

Once the assessment is issued, post lodgement of the SMSF Annual Return, the Member will have the choice of paying the tax personally, electing for the SMSF to pay the tax or not responding at all.

If paying personally, the tax is due within 84 days.

If instead, the Member elects to pay the tax from the SMSF, they have 60 days to make this election. Following the election for the SMSF to pay the tax, the ATO issues a Release Authority, giving the SMSF 10 business days to make the payment.

Taking our example above, a payment that may otherwise have been due around December is instead happening in the following October.

Preparing for payment

Given that the method of calculating Division 296 tax includes unrealised gains, an important reason to push out the date of payment may be to provide valuable time to make liquidity arrangements in the SMSF. This will be particularly relevant for SMSFs with less liquid investments like property and unlisted shares.

Understanding when to pay

It is not surprising that the current Release Authority process results in payment errors. As the original assessment has the option to pay personally, it includes payment information which some studious SMSF Trustees use to wrongly make payments immediately.

Depending on whether the Member has met a condition of release already will determine if the payment is just another benefit payment or a breach for “early release”.

It is therefore important for SMSF Trustees to properly understand when the Division 296 tax should be paid.

That time is AFTER the ATO has issued the Release Authority to the SMSF via SuperStream.

The SMSF Administrator will receive and pass on the Release Authority for approval and once approved, they will provide a Payment Reference Number that needs to be used when the payment is made from the SMSF.

The main thing to remember, if Division 296 is to be paid from the SMSF, that it is NOT to pay following receipt of an assessment personally. A payment should only be made following receipt of a Payment Reference Number from your SMSF Administrator.

The Division 296 tax will add another layer of complexity to our superannuation system, meaning it is more important than ever to work with SMSF Professionals who can provide you with practical insights.

 At Keep It Simple Super we have spent over 15 years helping Financial Advisers and Accountant deliver exceptional SMSF services to their clients. Keeping your clients happy and coming back each year is our goal. Book a discovery call with one of our team to see if we can help you create the perfect SMSF service for your business - Click here