Division 296 CGT adjustment — How and when to opt-in

Significant Division 296 tax liabilities could arise for some. However, an important one-time opportunity exists to make an adjustment (ie, reset) to the cost base of an SMSFs’ assets. This adjustment might significantly reduce the fund members’ resulting Division 296 tax liabilities.

However, this adjustment is not automatic. The relevant legislation requires that the trustee of the fund must make a specific choice. (See s 296‑50(2) of the Income Tax (Transitional Provisions) Act 1997 (Cth) (ITTPA).)

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Accordingly, this article sets out:

• how trustees can choose the adjustment; and
• when trustees may choose the adjustment.

Division 296 Cost Base reset

Effectively, the adjustment will enable trustees to disregard pre‑1 July 2026 unrealised capital gains when calculating Division 296 fund earnings. If the trustee has made the choice, typically the cost base will be the market value of the asset on 30 June 2026.

Only gains accruing after 30 June 2026 will be relevant for Division 296 fund earnings.

The adjustment is only relevant in working out the Division 296 fund earnings. It does not alter the cost base of the asset for ordinary CGT purposes. As such, trustees who make the choice will need to maintain two separate cost bases. One for ordinary CGT purposes and the other for Division 296 purposes.

How to access the adjustment

A choice to apply the adjustment has the following characteristics:

• It must be in the approved form.
• It applies to all CGT assets of the fund at the end of 30 June 2026.
• It can only be on or before the due day for lodging the fund’s income tax return for the 2026–27 income year.
• It is irrevocable.

Interestingly, although a choice may be made at present, the ATO currently do not appear to have provided the approved form.

The ATO have a webpage that lists all ATO approved forms. This webpage is very convenient. It is located at https://www.ato.gov.au/forms-and-instructions/approved-forms-consolidated-list-by-tax-topic . Readers might wish to periodically check back to this webpage in order to obtain the form once the ATO releases it.

Further, trustees who make the choice must keep a record of the choice for a period of 5 years. This begs the question: five years from when? The legislation answers this as (ITTPA s 296‑55(3)):

… 5 years after it becomes certain that no CGT event (or no further CGT event) can happen such that the record could reasonably be expected to be relevant to working out the fund’s Division 296 fund earnings for an income year.

In short, trustees might need to keep the record of the choice for many more than five years!

Prescribed period to make the choice

The last day that a trustee may make the choice varies depending on the fund’s circumstances.

These dates typically include the following:

• 31 October 2027 — for SMSFs that lodge their annual returns without a tax agent;
• 28 February 2028 — for newly registered SMSFs lodging via a tax agent; and
• 15 May 2028 — the final lodgement date for SMSFs lodging via a tax agent.

What happens if a trustee fails to make the choice

Trustees that fail to make a choice within the prescribed period will forfeit the opportunity to apply the adjustment.

The resulting liabilities could potentially be harsh. This could be particularly so where a trustee has held assets for decades. For example, consider a trustee that:

• has held an appreciating asset for several decades; and
• does not choose the adjustment.

The Division 296 fund earnings might be far higher. In particular, the ‘net capital gain’ component of Division 296 fund earnings might significantly be higher (reflecting the date an asset was actually acquired rather than 1 July 2026). Hence, it would be appropriate for trustees to discuss when and whether to make the choice with their tax agent or legal advisor.