How Division 296 Can Shift Wealth After Death — Without Anyone Noticing

Doesn't April always seem familiar each year? There's the usual "high" from numerous public holidays (you can probably guess I'm writing this right after Easter). For SMSF accountants and advisers, there’s also something far more reliable: the 15 May deadline, and the annual ritual of speculating about what the Federal Budget might contain.

It's a gruelling exercise. We routinely invest more intellectual energy anticipating the Budget than the Government has spent drafting it. But the 15 May deadline doesn't care about that, so here we are.

What the Budget probably won't be

Earlier this year, tax reform looked like a live prospect. Superannuation might not have been the headline act — the Government had already achieved its big-ticket win by legislating Division 296 — but changes elsewhere felt plausible. Broadening the base. Lifting the overall tax take. The usual.

That expectation has cooled.

Between cost-of-living pressures biting harder than expected, fuel prices once again testing everyone's patience, stubborn inflation, and a geopolitical environment that seems permanently unsettled, the appetite for bold policy moves looks limited. Add an election cycle to the mix and ambition has a way of quietly excusing itself from the room.

So — probably not a blockbuster Budget.

That said, SMSF practitioners won't be short of things to occupy them. Because Division 296 keeps delivering.

Division 296 and death: what actually happens

Let's be clear about what Division 296 is, first.

It's an additional 15% tax on the earnings attributable to superannuation balances above $3 million. It applies from 1 July 2025. If your total super balance stays below $3 million, it doesn't affect you. If it exceeds $3 million, you pay an extra 15% tax on the portion of earnings that relate to the excess. Straightforward enough — at the headline level.

The draft regulations, however, have produced something that deserves a closer look: what happens when a high-balance member dies.

The short answer: Division 296 doesn't stop.

Under the draft framework, Division 296 liabilities continue to accrue on a deceased member's superannuation balance until that balance is fully paid out. The member is gone. The tax clock is still running.

And here's where it gets genuinely interesting — and genuinely complicated.

Following the liability, not the money

Division 296 liabilities that arise after death are assessed against the deceased member's estate. That's the key point. The tax bill goes to the estate.

But superannuation doesn't have to go through the estate.

In fact, with a valid binding death benefit nomination (or a reversionary pension), superannuation can bypass the estate entirely and pass directly to a nominated beneficiary. That's a feature of superannuation law that many clients rely on — and rely on deliberately.

So the structure is entirely possible — and common — where the superannuation goes one direction, and the tax bill goes another.

The money goes to the beneficiary. The bill goes to the estate. The estate and the beneficiary are not the same people.

A scenario that isn't hypothetical

Consider this setup, which you will recognise immediately because you've seen some version of it dozens of times.

An SMSF has two members: a person and their second spouse. Both are directors of the corporate trustee. The estate plan is sensible and considered:

• The deceased member's superannuation passes directly to the surviving spouse — via a binding death benefit nomination or reversionary pension

• Non-superannuation assets flow through the estate to children from the first relationship

This is standard blended family planning. It keeps the super out of the estate (which avoids it being contested), and separately provides for the children. Tidy. Logical. Nothing exotic.

Now add Division 296.

The surviving spouse is now the surviving trustee and member. They control the fund. The deceased member's superannuation sits in the fund — and they are in no particular rush to pay it out. After all, paying it out means losing control of those assets. Delay is, from a certain angle, attractive.

But here's what delay actually costs.

Every month that the deceased member's superannuation remains in the fund, Division 296 liabilities continue to accrue against that balance. Those liabilities are assessed against the deceased member's estate — not against the surviving spouse, and not against the superannuation fund itself.

The estate, of course, holds the non-superannuation assets. The assets that were always intended to pass to the children.

So the longer the spouse delays paying out the superannuation, the larger the Division 296 bill that lands on the estate — and ultimately reduces what the children receive.

To put it plainly:

• The surviving spouse receives the superannuation. In full. Untouched.

• The children receive the estate assets, less an accumulating Division 296 tax bill they had no part in creating and no power to prevent.

The spouse holds the lever. The children carry the cost. Nobody necessarily set out to create this situation.

What this actually means in practice

From a legislative standpoint, this outcome is internally consistent. The policy logic is that Division 296 should apply to earnings on high balances regardless of what's happening with the member. Death shouldn't be a mechanism for avoiding it. Fair enough, in principle.

The practical reality, however, is that the framework creates a structural tension in blended family situations that most clients have never considered — because until recently, there was no reason to.

The implications run in several directions:

Binding death benefit nominations need reviewing. A BDBN that made perfect sense before Division 296 may produce outcomes nobody intended once Division 296 is factored in. The direction of the superannuation benefit, and the pace at which it's paid, now has tax consequences for people who aren't even receiving it.

Trust deeds and trustee obligations matter more. If a surviving trustee delays paying out a

death benefit, and that delay generates a Division 296 liability that reduces the estate, there are questions worth asking about trustee duties and potential conflicts of interest. Advisers who haven't started those conversations yet probably should.

Legal advisers are going to be very engaged with this. Estate litigation is already a growth industry. Adding a mechanism where one beneficiary's decisions directly affect another beneficiary's inheritance is, to put it gently, not going to reduce the caseload.

Clients in blended family structures need specific advice now — not at the next review. This is the kind of issue that, discovered after the fact, tends to prompt difficult conversations about why nobody mentioned it earlier.

The broader point

Division 296 was legislated. The draft regulations are progressing. The policy isn't going away, and SMSF balances above $3 million don't become less complex simply because the environment is uncertain.

The Budget may or may not bring further changes. April may or may not produce useful signals. But Division 296, and the questions it raises for estate planning in particular, is generating its own work with or without Government assistance.

As always, the devil is not in the policy announcement. It's in the regulations, the scenarios nobody modelled at the time, and the clients sitting in your waiting room who have absolutely no idea any of this applies to them.

Stay informed on the $3 million super tax — Division 296 News and Resources

This material is general information only. It is not financial product advice and does not take into account your individual circumstances, objectives or needs. Before acting on anything in this article, please seek advice specific to your situation.