Mark Ellem, head of education for Accurium, says with the anticipated introduction of the proposed Division 296 tax, SMSF trustees and their advisers face significant new considerations for the 2025–26 income year and beyond.
“The central question for SMSFs is when should TEA be adopted if it is to be implemented for the first time?” he said.
“The answer: ideally for the financial statements prepared for the 2024–25 income year, the year immediately before the commencement of Div 296.”
Ellem continued that traditionally, SMSFs have not applied tax effect accounting in their financial statements.
“However, TEA aligns the carrying value of assets with their underlying tax attributes, most importantly recognising deferred tax liabilities (or assets) that arise where the asset’s market value diverges from its income tax cost base, such as unrealised capital gains,” he said.
“From an accounting perspective, this is referred to as the ‘matching principle’. The methodology used when preparing the annual financial statements and member balances feeds directly into the SMSF annual return, and ultimately, the calculation of each member’s total superannuation balance.”
He continued that this is particularly relevant for the Div 296 tax, which compares superannuation balances at 30 June 2025 and 30 June 2026 to determine the increase in earnings for individuals above the $3 million threshold.
It’s therefore important, he said, that preparers of SMSF annual financial statements and, in particular, the SAR understand several elements, including the definition of TSB, how the ATO calculates it and where it gets the information to allow them to perform the calculation and how the TSB information is reported in the SMSF annual return.
Additionally, on the issue of how the ATO calculates TSB, it’s vital that SMSF professionals also determine whether the amount pre-populated by the SMSF administration platform does indeed equate to TSB, and if not, how to report the correct amount for TSB.
“There are two critical reasons for the timing of implementing TEA, the first being the alignment of calculation methodology,” Ellem said.
“The Div 296 tax is calculated by reference to the movement in total superannuation balance between two points in time. If TEA is adopted in 2024–25, then both the 30 June 2025 and 30 June 2026 balances will be determined consistently, ensuring comparability. This eliminates distortions that could otherwise arise if different accounting treatments are used for the two years.”
The second reason for starting TEA for the 2024–25 income is to avoid over- or understatements.
“If an SMSF defers TEA until 2025–26, the 30 June 2025 closing balance (as reported in the SMSF annual return) would not reflect deferred tax liabilities, unless the pre-populated figure is effectively manually overridden by including the correct TSB figure in the Member Section of the SAR,” Ellem said.
“Where market values are materially above CGT cost base, this can overstate member balances for 2025, as unrealised capital gains are not adjusted for potential tax obligations. When TEA is first applied in the 2025-26 year, 30 June 2026 balance will reflect this adjustment, artificially deflating the reported growth in balance, and, in turn, understating the Div 296 tax liability.”
He said this will result in the member’s increase in superannuation balance, and thus their Div 296 tax exposure, appearing lower than it is, due to presenting the two years’ balances on an inconsistent basis.
“Conversely, adopting TEA for the 2024-25 income year ensures both opening and closing balances for the Div 296 calculation are prepared under the same methodology, avoiding mismatches and potential scrutiny.”
