Daniel Butler, director of DBA Lawyers, told SMSF Adviser that in the transitional arrangements of the revised legislation the change in respect of death is out of line with the prior draft, which provided an ongoing exemption from Div 296 tax if a person died before 30 June in any financial year and not just for the first “transitional” year.
“This results in the Div 296 tax being labelled a death tax given the change in treatment on this point,” Butler said.
He added that the transitional arrangements apply if an individual dies during the first year of the Div 296 tax, meaning an individual who dies before the last day of the 2026-27 income year is not liable to pay Division 296 tax for that year (Schedule 1, item 25, Subdivision 296-A, section 296-1(3) of the Income Tax (Transitional Provisions Act 1997].
“Draft section 296-1(3) states that you are not liable to pay Div 296 tax for the 2026‑27 income year if you die before the last day of the year,” he said.
“In contrast, s296-30 of the prior draft (now defunct) Div 296 legislation stated in s296‑30 exception — death that you are not liable to pay Div 296 tax for an income year if you die before the last day of the year.
“The relief for death in the 2026-27 income year is a transitioning provision for this year only and one way of avoiding the tax is dying before 30 June 2027. However, those that die on 30 June 2027 are still liable for the tax.”
He continued that “it appears that the revised Div 296 will be a new form of death tax” moving forward unless the government backs down under pressure with feedback from the consultation process, which must be received prior to 16 January 2026.
“It’s also important to note that when a person dies, their legal personal representative remains liable for their tax and other liabilities,” Butler added.
“When you read between the lines it means that in any other year than 2026-27 you’ll get pinged, and that’s a big change, because under the former, now defunct legislation, there was a position that if you died, you would just get out of your Div 296 tax (but not your other tax liabilities). It was quite straight forward – as long as you died before 30 June. However, now the legislation says that is only for the 2026-27 year so that means in the future people will get taxed under Div 296 after death.”
Butler continued that it is a “significant change” for taxpayers and is an opportunity for the government to generate more revenue from a person’s death.
“We know that the revised Div 296 measure is costing the government, so this is one area that it is tightening up on. Certainly, a number of professional bodies will be saying that’s unfair and there needs to be more empathy when a person dies,” he said.
Furthermore, Butler said, the change will have the effect of accelerating the time that Div 296 tax will be paid by a surviving spouse given the surviving spouse will be tested based on the higher of the start or the end of the financial year. However, for 2026/27 the $3 million and $10 million thresholds will be measured at the end of each financial year.
“For example, if dad dies on 1 January 2028 (after the transitional year of 2026/27) with an automatically reversionary pension in favour of mum and each have $2 million in super, mum will be assessed to Div 296 tax in respect of the 2027/28 financial year given she will have more than $3 million at the end of that financial year provided she also derives some superannuation earnings in respect of her interests which includes the reversionary pension transferring to her upon dad’s death,” he said.
He said under the former, defunct draft legislation, proposed s 296-55(1)(d) provided:
(d) subject to subsection (3), the “total superannuation balance value, on a day during the year on which you start to be a *retirement phase recipient of a *superannuation income stream because of the death of another person, of the superannuation interest in a superannuation plan that supports the superannuation income stream.
“Broadly, the TSB value of dad’s automatically reversionary pension would not be counted in mum’s adjusted TSB at the end of the year during which dad dies, rather it was treated as a contribution which was subtracted from the TSB figure in calculating superannuation earnings under the prior draft legislation,” he said.
“The pension balance from dad’s reversionary pension would, however, be counted in mum’s TSB in the following financial year assuming no withdrawal was made prior to the start of the next financial year under the prior draft legislation.”
Moreover, he said, sec 296-50(1)(b) of the new draft legislation also confirms the fact that a person’s total superannuation earnings includes earnings in relation to an automatically reversionary pension.
Section 296-50 states: Your total superannuation earnings
(1) The amount of your total superannuation earnings for an income year is the total of your *relevant superannuation earnings for the year for:
(a) each *superannuation interest of yours that you have at any time in the year; and
(b) each superannuation interest that supports a *superannuation income stream of which you are a *retirement phase recipient at any time in the year because of the death of another person.
“Thus, the calculation of superannuation earnings becomes more complicated as there will be a need to calculate the earnings of the two interests and pro-rate those earnings for the time period that the reversionary pension was paid to mum for that financial year,” he added.
“This will give rise to a lot of people considering whether they continue to make their pensions reversionary to their surviving spouse. Moreover, it will encourage members with legacy pensions to consider whether they can exit such pensions.”
Butler also noted that there is the prospect under the draft legislation for a member to be liable for Div 296 tax for numerous years after they die as the payment of a death benefit may be delayed due to a legal dispute or difficulty in realising an asset.
“In this instance, the deceased’s legal personal representative will be liable for the Div 296 without necessarily being able to access any money from the super fund to pay the tax,” he said.
“This could give rise to considerable hardship where a deceased member’s LPR cannot access the super money to pay the Div 296 tax as the super fund trustee is in a dispute with the beneficiaries claiming the death benefit.”
