Death now won’t eliminate Div 296 liability

The draft regulations for the new super tax clarify that death does not remove Division 296 exposure.

Instead, earnings attributable to the deceased member’s interest continue to be assessed, even after death, until the benefit is fully dealt with.

Peter Burgess, CEO of the SMSF Association, said a key concern in the draft regulations  is post-death attribution of earnings. 

“Applying tax to earnings after death is a significant outcome that wasn’t clearly evident from the legislation or explanatory materials and raises important questions about how Division 296 will operate in practice, particularly where the payment of death benefits can span multiple years due to matters outside of a trustee’s control,” he said.

Daniel Butler, director of DBA Lawyers, told SMSF Adviser this introduces significant administrative complexity, especially where estates take years to finalise.

“Prior to the regulations being released, the legislation provided that the total super balance value at the time of death and therefore at end of the financial year of death would be nil and this position gave rise to the thinking that it was the case, if you paid out the death benefit in the year of death, you would be taxed on your total superannuation earnings under Div 296 in respect of that year if your opening balance was over the $3 million threshold,” Butler said.

There is however a transitional rule for the 2026/27 year in s 296-1(3) Income Tax (Transitional Provisions) Act 1997 that provides:

You are not liable to pay Division 296 tax for the 2026‑27 income year if you die on or before the last day of the year.

“However, if the death benefits were paid out in a subsequent year (ie, after 2026-27), there was no clarity in respect of whether Div 296 would apply given that your TSB at the start of the year would be nil.”

Butler said the draft regulations now stipulate in regulation 296.70.04 that the deceased person’s relevant earnings in the year in which they die will include earnings attributable to that interest up to their death, as well as earnings attributable that occur from the time of the person’s death until the benefits have been paid or distributed by the fund, or the time when another person receives a pension because of the member’s death.

“What they’re actually saying is in the year you die, you’ve not only got to bring into account that year’s earnings, but also bring into account the future years’ earnings on your interest, which is very novel because you won’t know that when you’re filing the fund’s tax return, or the ATO is issuing Div 296 assessments,” he said.

“In some cases, it’s going to take years down the track [to calculate] if there is a legal dispute or difficulty in realising an asset to pay out a death benefit. We’re not sure how the system will work, because generally you are assessed on your net earnings in the return in the year of death. 

“Under Div 296 the ATO will do the assessment from the information it collects from funds with ‘in-scope’ members, so we are not sure how the ATO can obtain the relevant superannuation earnings information for future years when finalising the assessment for the year of death. It will be interesting to see how the reporting system will deal with this and what further changes will be needed.”

Butler explained that if a member dies in 2029 and they still have a super balance in the 2030 financial year, and in practice, it takes time to realise assets, pay out debts, resolve disputes or sell difficult assets.

“It could take years. In some cases it could be four or five years down the track, so the ATO will bring back the details for the next four to five years, back to the 2029 year to calculate the Div 296 tax payable.”

“The attributable earnings for small super funds are based on an averaging and the formula is provided in the regs. There is a modification in respect of death. Where there is a death and the benefit has not been fully paid out, or it’s not an automatically reversionary pension, in that instance, there can still be a Div 296 liability, presumably, where the legal personal representative will be liable, given that it’s for a deceased member,” he said.

“The issue here is that the legal personal representative may not have any money to pay the Div 296 tax as the death benefits may have been paid to the dependants. For example, the SMSF pays to the second spouse and the former spouse is the LPR who wears the Div 296 tax and since the death benefit has already been paid, there is no money to obtain from the fund even if the LPR is provided a release authority. This is a really bad [legislative] design and outcome and hopefully this will be revised before the regs are finalised.

“The initial drafting of the legislation said, once you’re dead, you’re basically out apart from the date of death so people thought they might be able to get around the Div 296 if there was a delayed death benefit paid after the year of death, but they have reintroduced the death tax by these new measures. They’ve clarified that by dying, you don’t get out of your tax liability.”

David Busoli, principal of SMSF Alliance, said the clarification of the treatment of death benefits is the most significant item in the new draft regulations.“In the first year of operation, the Div 296 tax rate is determined by the total super balance at the end of the year. If a member dies during the year, they will not be subject to Div 296 tax. This has not changed,” Busoli said.“The method in subsequent years is a little different to what we had thought. In the 2027-28 year the member’s total super balance, for Div 296 purposes, is the higher of the member’s total super balance at the beginning (30 June 2027) and the end (30 June 2028) of the year. If the member dies during the year their total super balance drops to nil, so the start of year total super balance determines the Div 296 tax rate applicable to their Div 296 earnings.

“Div 296 tax is not payable in subsequent years if the death benefit has not been settled by the end of the year of death. All of this has not changed. What has changed is our interpretation. We believed that, if the death benefit payment was not finalised by 30 June 2028, resulting in asset sales being delayed to the 2029 financial year, the earnings attributable to those asset sales would not be subject to Div 296 tax.

“This is not the case. The regulations provide for the earnings, including asset sales, that occur in the 2029 year until the death benefit is paid, to be included in the 2028 Div 296 tax return. This effectively negates the ‘strategy’ of dying late in the financial year.”

Busoli continued that superannuation trustees may be encouraged to pay death benefits earlier; however, due to the nature of some scenarios involving difficult investments or disputed beneficiaries, the process may not be completed for several years.

“As Div 296 is payable by the estate, not the super fund, this will only exacerbate the problem that will arise if measures have not been put in place to protect estate beneficiaries from Div 296 tax, particularly where estate and superannuation beneficiaries are not the same individuals,” he said.He added that this is not relevant to reversionary pensions as they will immediately add to the reversionary beneficiary’s total super balance and earnings from the date of death.

“This means that they may move an otherwise unaffected reversionary beneficiary into the scope of Div 296 within the year of the primary pensioner’s death – but this is not new,” he added.

Keeli Cambourne

March 19 2026

smsfadviser.com