Division 296 CGT reset for SMSFs: practical operation and strategic considerations
From 1 July 2026, Division 296 will impose an additional layer of tax on a proportion of superannuation earnings attributable to members with higher superannuation balances. As part of the regime, complying SMSFs and other small superannuation funds may elect to reset the cost base of relevant CGT assets to market value at 30 June 2026 for Division 296 purposes.
In practical terms, the reset is intended to prevent unrealised gains that accrued prior to 1 July 2026 from being brought into future Division 296 calculations. However, while the concept appears relatively straightforward, the practical effect of the reset can become significantly more complex depending on the nature of the underlying assets and investment structures involved.
For many SMSFs, the key considerations will involve determining whether the reset should be applied, addressing any valuation requirements at 30 June 2026, and ensuring the election and supporting records are properly maintained over time.
How the Division 296 CGT reset works
Broadly, complying SMSFs may elect to reset the cost base of directly held CGT assets to market value as at 30 June 2026 for Division 296 purposes.
The election is made at the fund level and applies to all directly held CGT assets of the fund. It cannot be selectively applied to individual assets and, once made, cannot be revoked.
The legislation requires the election to be made in the approved form by the due date for lodgement of the fund’s 2026–27 income tax return. While further ATO guidance is still expected, it is anticipated the election process will be incorporated into the SMSF annual return process for the 2026–27 financial year.
Accordingly, the validity of the election will effectively depend on the fund’s 2026–27 annual return being lodged by the applicable due date. Failure to do so may result in the fund permanently losing access to the Division 296 CGT reset.
This creates significant practical risks for both trustees and advisers. In particular, SMSFs may become subject to earlier lodgement deadlines — for example, due to prior late return lodgements — requiring careful monitoring of the fund’s applicable lodgement program. Ensuring internal workflows can finalise FY2027 compliance work and lodge returns on time becomes critical.
Trustees are also required to retain records of:
the election itself; and
the cost base and reduced cost base of each relevant CGT asset.
Those records must generally be retained for five years after the final CGT event occurs in relation to the relevant reset assets.
Importantly, the reset applies solely for Division 296 purposes and does not alter the fund’s ordinary CGT position.
As a result, where an SMSF subsequently disposes of a reset CGT asset, separate calculations may be required for:
ordinary income tax purposes; and
Division 296 purposes.
For ordinary income tax purposes, the SMSF will continue to calculate any capital gain or loss using the asset’s ordinary cost base under the existing CGT rules.
However, for Division 296 purposes, the fund’s taxable income calculation used in determining Division 296 fund earnings is broadly modified to recognise the asset’s 30 June 2026 market value as its relevant cost base.
In practical terms, this means the SMSF may recognise:
a larger capital gain for ordinary income tax purposes; but
a reduced gain for Division 296 purposes reflecting growth arising after the commencement of Division 296.
The modified Division 296 calculation then feeds into the Division 296 fund earnings attributable to the relevant member or members in determining any resulting Division 296 tax liability.
Assessing whether the CGT reset should be applied
For many SMSFs, the Division 296 CGT reset is likely to involve broader long-term considerations extending beyond immediate Division 296 exposure.
Conceptually, most SMSFs holding assets with unrealised capital gains at 30 June 2026 would be expected to elect to apply the reset. In many cases, the election should reduce future Division 296 exposure by ensuring future Division 296 calculations reference market values at 30 June 2026 rather than historic CGT cost bases.
Importantly, the reset should also be considered even where member balances are currently below Division 296 thresholds.
As the election is a one-off transitional measure, many SMSFs may still conclude it is appropriate to apply the reset to assets at 30 June 2026 even where Division 296 exposure is not currently expected, recognising that future investment performance, contributions, inheritances or other liquidity events may ultimately bring members within the scope of Division 296 over time.
The more difficult analysis often arises where an SMSF holds a combination of assets with both unrealised gains and unrealised losses at 30 June 2026.
Because the election applies across all relevant CGT assets of the fund, trustees cannot selectively reset only those assets carrying unrealised gains while preserving higher cost bases for loss assets. As a result, the practical benefit of the election may depend heavily on the relative size of the unrealised gains and losses within the portfolio, together with the expected long-term investment outlook for those assets.
In practice, the most common scenario is likely to involve portfolios containing a combination of unrealised gains and losses, requiring a broader assessment of:
the relative magnitude of embedded gains and losses across the portfolio;
expected future investment performance;
the likely timing of future disposals; and
whether particular unrealised losses are likely to be temporary or structural in nature.
Indirect assets and unit trust structures
Additional complexity arises where SMSFs hold assets indirectly, typically through unit trust structures.
The Division 296 reset applies at the level of the SMSF’s direct investment interest — for example, units held in a unit trust — rather than the underlying assets owned by the unit trust itself.
This distinction can become significant where the unit trust holds assets with substantial unrealised gains.
For example, an SMSF may reset the cost base of units held in a unit trust at 30 June 2026. However, if the unit trust subsequently disposes of an underlying property or investment asset, distributions to the SMSF may still economically reflect gains that accrued prior to 1 July 2026.
In those circumstances, the practical operation of the reset can become significantly more complex.
For example, if the underlying asset is disposed of before the SMSF disposes of the units, the SMSF may still recognise the distributed capital gain notwithstanding the reset applied to the units themselves.
By contrast, where the underlying structure is wound up in the same income year that the underlying gains are realised, the reset-adjusted cost base of the units may potentially interact more effectively with the resulting gain outcomes for Division 296 purposes.
Similarly, where the SMSF disposes of the units before the underlying asset itself is sold, the reset may operate more effectively at the investment interest level because future gains may instead arise in the hands of the subsequent investor.
However, practical limitations often arise in real-world structures. The underlying entity may continue to hold other assets that cannot readily be realised, there may be limited or no market for disposal of the units, or the SMSF may not control the timing of asset disposals, distributions or winding up of the structure — particularly where multiple investors are involved.
This issue is likely to be particularly relevant for:
pre-existing unit trust structures;
unit trusts holding business real property; and
development or other long-term investment assets held indirectly through trusts.
Careful analysis of indirect ownership structures and broader superannuation structuring is therefore likely to become an important part of Division 296 planning for many SMSFs.
Valuations and record keeping
The practical effectiveness of the Division 296 CGT reset will depend heavily on the quality of the supporting valuations and records maintained by the SMSF.
As the reset references market values at 30 June 2026, trustees should ensure appropriate contemporaneous valuation evidence is obtained and retained for all relevant assets. Depending on the nature of the investment, this may involve formal property valuations, listed security pricing records, unit trust valuation methodologies, financial statements or other supporting working papers.
Maintaining clear records will become particularly important over time as future disposals may require separate calculations for:
ordinary CGT purposes; and
Division 296 purposes.
In practice, this may require SMSFs to separately track cost bases for ordinary CGT purposes — which may themselves already reflect original acquisition cost bases or 2017 CGT reset positions associated with the introduction of the transfer balance cap — together with separate Division 296 reset cost bases and related gain calculations.
While it would be expected that SMSF administration software providers will progressively develop functionality to track Division 296 reset cost bases and associated calculations, the integrity of the underlying valuation evidence and supporting records will still remain critical — particularly for long-term assets, indirect investment structures and future restructuring transactions.
Trustees should also be conscious that the record retention obligations associated with the reset may extend well beyond ordinary SMSF record keeping periods, particularly where assets continue to be held for many years after 30 June 2026.
Closing observations
The Division 296 CGT reset is likely to become a significant practical and strategic consideration for many SMSFs.
While the underlying concept of resetting CGT cost bases to market value at 30 June 2026 appears relatively straightforward, determining whether the election should be applied is likely to become more complex in real-world SMSF structures — particularly where portfolios contain a combination of unrealised gains and losses, indirect investment structures are used, or future transaction timing remains uncertain.
Importantly, the reset should not be viewed solely through the lens of current Division 296 exposure, as the election may still become relevant even where member balances are currently below Division 296 thresholds.
We have also separately considered indexed superannuation thresholds from 1 July 2026 and related contribution, pension and balance management considerations.
The practical operation of the reset is also likely to elevate the importance of:
obtaining and retaining appropriate valuation evidence at 30 June 2026;
maintaining long-term records supporting both ordinary CGT and Division 296 calculations; and
ensuring the fund’s 2026–27 annual return is lodged on time so the election is valid.
Over time, the practical effectiveness of the reset is likely to be shaped less by the election itself and more by the structure of the underlying investments, the timing and control of future transactions, and the quality of the supporting records maintained by the fund.
We welcome enquiries from professional advisers and private clients seeking to review Division 296 implications, SMSF structures, and long-term superannuation and investment structuring.