For some SMSF trustees, the debate over Division 296 has never just been about tax. It was about whether farmers, family business owners and other Australians with illiquid assets inside super could be forced to pay tax on value they had not realised and cash they had not received. That is why for farming and business families who operate their farm through their SMSF, the final shape of the legislation matters so much.
The passage of Division 296 through Federal Parliament marks a significant moment for Australia’s superannuation system. Few tax proposals in recent years have generated as much debate and uncertainty among self‑managed super fund (SMSF) trustees, particularly those holding illiquid assets such as family farms and business property.
At its core, the concern was simple: many of these trustees are asset rich but cash flow constrained. A family farm may rise in value over time, and business premises may appreciate too, but neither produces the liquidity needed to meet an annual tax bill. For those using superannuation as a long-term vehicle for wealth preservation, retirement planning and intergenerational succession, that created both a real practical risk as well as a genuine policy problem.
The original design of Division 296 was controversial, as its main aim was to gain extra government revenue by installing an additional tax on superannuation balances over $3 million. However, the drafting and public consultation process have made the system fairer and more straightforward.
The decision to exclude unrealised gains from the tax base and to index the thresholds is not just sensible tax policy, it is a practical recognition of how wealth is often held in regional Australia and across the small business sector. It particularly helps support farmers and small business owners who use superannuation as a long‑term wealth and succession vehicle.
Why the original proposal mattered so much to SMSFs
The initial design of Division 296, taxing earnings above $3 million based on changes in account balances, including unrealised gains, disproportionately affected SMSFs with lumpy, illiquid assets.
For farmers and small business owners, it is common for the family farm, factory or commercial premises to sit inside an SMSF. These assets may appreciate significantly on paper during strong market cycles, despite generating limited cash flow. Under the original proposal, trustees could have faced a tax bill without having sold an asset or received any income to fund it.
That outcome cut against a core principle of good tax design, which is the ability to pay.
By removing unrealised gains from the calculation, the government has acknowledged this flaw. Taxing realised outcomes, rather than paper movements, better aligns the system with economic reality, particularly for asset‑rich, income‑poor retirees.
Indexation matters more than it sounds
Indexing the $3 million threshold is another important improvement. Without indexation, more Australians would inevitably have been dragged into the tax over time due to inflation alone. This would have started to capture people the policy was never intended to target.
For farmers and business owners, asset values can rise substantially over decades, even if real purchasing power has not. Indexation ensures Division 296 remains targeted at genuinely high balances, rather than becoming a stealth tax on everyday Australians.
This is particularly important in regional Australia, where land values have increased sharply, often independent of cash income.
Super is still attractive, but no longer a default answer
The introduction of Division 296 does not automatically make superannuation unattractive. In fact, for many advised clients, super will remain a highly favourable environment, even with the additional tax.
What has changed is the need for more nuanced comparisons between personal marginal tax rates and the combined tax burden inside super, including Division 296.
In many cases, particularly where personal income is limited, managing balances to remain below the threshold may make sense. In others, paying a higher effective rate inside super may still be preferable to holding assets personally, depending on cash flow, estate planning and risk considerations.
Capital gains tax (CGT) is a good example. Assets held in super receive a 33 per cent CGT discount after 12 months, compared with the 50 per cent discount available to individuals. For very large balances, particularly those above $10 million, the relative tax rates inside super can, in some circumstances, exceed what an individual would pay outside the system.
What the legislation means for advisers and clients
Ironically, while the revised design is fairer, it is also more complex.
The original proposal, taxing changes in balances, was blunt but relatively easy to calculate. The revised framework, which isolates realised earnings attributable to balances above indexed thresholds, will require additional reporting, calculations and administration.
For SMSFs, this means more work, higher advice costs and an increased compliance burden. For large APRA‑regulated funds, the challenge is arguably even greater, as many do not report earnings at an individual member level in a way that neatly aligns with the new rules.
How these funds will implement the legislation and how they will pass on the associated costs, remains unclear. There is a real risk that members with balances well below $3 million could face higher fees to fund compliance with a measure never intended to affect them.
Time will tell whether those costs are absorbed by funds, passed on equitably, or spread indiscriminately across the membership base.
Division 296, in its final form, is a reminder that tax reform is rarely perfect, but it can be improved.
By excluding unrealised gains and indexing thresholds, the government has addressed the most controversial aspects of the original proposal. For farmers and small business owners, this preserves the role of superannuation as a stable, long‑term vehicle for holding productive assets and managing intergenerational wealth.
At the same time, the legislation underscores the growing importance of strategic advice. The era of “set and forget” super is over. Trustees must now actively assess where assets are held, how income is taxed and how policy risk is managed over time.
Superannuation remains a powerful tool, but like any tool, its effectiveness depends on how carefully it is used.
If you are interested to know more about how the Division 296 tax changes will impact your portfolio and
personal finances, please talk to your Integro adviser.
If you are not an existing client, get in touch via email at: [email protected].
