“Having now had an opportunity to review the draft bills, it is our view that the revised legislation needs more work. We understand Treasury’s desire for simplicity, and we accept simplicity often comes at the expense of unfair outcomes for a small minority, but right now Treasury hasn’t got this balance right,” Peter Burgess told SMSF Adviser.
“There are too many scenarios, which are not unusual or unlikely, which could lead to unintended consequences and unfair outcomes. Adjustments are required to address this. It remains our view that there are other more cost-effective and less complex alternatives that should be considered by the government.”
In its submission to Treasury on the draft legislation, the association said the practical changes to the policy announced in October 2025 provide a more appropriate method of calculating superannuation earnings, however, there are several matters that require further consideration.
It continued that the revised draft bill could be improved to strike the right balance between equity and fairness, and following a thorough reading several unintended consequences have been identified.
“The imposition of Division 296 tax on individuals who may not be the beneficiaries of the superannuation benefit which gave rise to the Div 296 liability, and inappropriate amounts of Div 296 earnings being attributed to in-scope members, are some examples,” the submission stated.
“Adjustments are required to ensure these, and other instances of unfair outcomes and unintended consequences are minimised.”
The submission also outlines a proposed change to the CGT adjustment provisions to simplify their application and, while the association acknowledged that the decision impact analysis is yet to be released, it said it is clear the changes announced in October 2025 will result in “substantial increases” in implementation and ongoing costs for the superannuation industry that will ultimately be borne by all superannuation fund members, and not just those who are in scope.
“These costs raise serious concerns about the ongoing sustainability of Div 296 considering the expected revenue gain to government,” it stated.
“Our view remains that there are other more cost-effective and less complex alternatives that should be considered.”
The first concern raised in the SMSFA’s submission relates to the total super balance reference amount, and specifically the impact of insurance proceeds.
It noted that while individuals who have made a structured settlement contribution are excluded from Div 296, there is no similar concession for individuals who have received TPD insurance proceeds via superannuation, which usually represent large payments to provide funds for ongoing medical and care expenses.
The SMSFA stated that either impacted individuals be excluded from Div 296 altogether, or that an adjustment be made to their TSB value to reflect the amount of insurance proceeds received.
“Similar situations can also arise following the death of an insured member in the fund. That is, the proceeds of a life insurance policy owned by the trustee(s) of the fund, which are allocated to the deceased member’s account, can often result in a large increase in the deceased member’s balance,” it continued.
“If the death benefit is not subsequently paid to beneficiaries before the end of the income year, it could result in a Div 296 tax liability which would otherwise not have arisen had the life insurance proceeds not been received.”
It recommended that to prevent these unintended situations from arising, a deceased member’s TSB should be adjusted by the amount of life insurance proceeds received.
Furthermore, the association’s submission raised concerns over the included TSB integrity measure, stating that there will be various situations in which the proposed use of the greater of the TSB opening and closing values will create potentially unintended consequences.
“For example, members suffering losses outside of their control, such as occurred with Shield and First Guardian, would have their Div 296 tax liability calculated based on balances which have simply disappeared,” it stated.
“In addition, post 1 July 2027, an individual who has a temporary spike in their TSB at the ‘wrong’ time, such as toward the end of the financial year, will potentially be penalised for that twice – in the year in which the spike occurs and the following year.”
The submission provided an example of Sarah, whose TSB from the previous income year was $2.7 million but following a stock market rally just before the end of the income year, her TSB at the end of the income year increase to $3.5 million, the figure on which she would be assessed for Div 296.
“Shortly after the commencement of the following income year there is a stock market correction which reduces her TSB below $3 million. By the end of the income year her TSB has reduced to $2.5 million,” the example stated.
“Sarah will still be subject to Div 296 tax because her TSB just before the start of the income year was $3.5 million. This is despite her TSB being less than the large superannuation balance threshold for the majority of the income year. The reduction in Sarah’s TSB was not the result of any deliberate action taken by Sarah to avoid a Div 296 tax liability but rather was the result of investment market movements beyond her control.”
The submission stated that while the association understands Treasury’s capture individuals who withdraw large amounts from superannuation in the same year in which their fund’s Div 296 earnings are high such as when assets have been realised resulting in an artificial reduction in their taxable superannuation earnings, the proposed approach lacks equity and fairness.
“The TSB measure is imperfect but is the best available method using established tests and values,” it added.
“The method adopted should represent as close as possible a taxpayer’s true position and not create artificial elements which give rise to unintended consequences.”
Additionally, the SMSFA questioned the additional cost and complexity of this measure versus the likely small increase in tax revenue and recommended, in the interest of increased simplicity and to avoid unintended consequences, that a fixed TSB test time be used.
“At the very least, members who have not satisfied a full condition of release should not have their TSB determined as the greater of their TSB opening and closing values,” it stated.
“We note the amendments will provide a regulation-making power to specify a value or a method for determining a value of a superannuation interest. Should the Government proceed with this approach, the ATO Commissioner should be given the discretion to adjust a member’s TSB calculation if the proposed approach would otherwise result in an outcome incongruent with the policy intent.”
Instead of using the greater of the start and end TSB for determining in scope members for Div 296 application, the provision should reference only the end TSB and have withdrawals added back, as in v1. That way, only deliberate TSB manipulation would be caught and not, as Peter has stated, uncontrolled events such as market spikes etc.