Overview

As Division 296 moves from policy discussion to legislative reality in Australia, Self-Managed Super Fund (SMSF) trustees and their advisers must reassess their estate planning strategies. The introduction of this tax regime, targeting high superannuation balances, presents significant implications for succession planning, death benefit nominations, and the management of reversionary pensions.

Legislative Status

Division 296 is set out in the Treasury Laws Amendment (Better Targeted Superannuation Concessions) Bill 2023, amending the Income Tax Assessment Act 1997 (Cth). As at July 2025, this measure remains before Parliament and is not yet enacted.

Why Division 296 Demands a Fresh Look at Your Estate Plan

Division 296 proposes an additional 15% tax on notional earnings related to superannuation balances exceeding $3 million. Notably, these earnings include unrealised gains, creating complexity and potential liquidity challenges for members. This tax is not limited to living members—it can also apply when a member of an SMSF passes away.

Notional earnings for Division 296 purposes are calculated using a statutory formula based on the change in a member’s total superannuation balance (TSB) from the start to the end of each financial year, adjusted for withdrawals and contributions. This may result in a tax liability even if no actual gain has been realised.

Division 296 will apply to all superannuation interests in Australia; however, this article focuses on SMSF-specific considerations.

Key Estate Planning Impact: When One Member Dies

A critical issue is how Division 296 can suddenly capture individuals who previously sat below the $3 million threshold. For example, a couple may each have superannuation balances under $3 million. Upon the death of one member, the survivor may receive a reversionary pension or death benefit that pushes their total superannuation balance over the threshold, triggering Division 296 exposure.

This scenario—sometimes referred to as the “grandma tax”—reflects the reality that women, who statistically outlive their partners, may inherit superannuation benefits and face a Division 296 tax bill on amounts exceeding $3 million. The implications are significant for families, especially during times of grief and transition.

While reversionary pensions typically count towards the recipient’s transfer balance cap 12 months after death, for Division 296 purposes a member’s total superannuation balance is assessed as at 30 June each financial year. The timing of death and the reversion of an existing income stream can therefore have different effects under each regime.

Practical Example

Scenario	Before Death	After Death (Survivor)	Division 296 Exposure
Couple (each with $2m in super)	Both under $3m individually	Survivor receives deceased’s $2m as a pension income (total assessable benefits $4m)	Yes—survivor now over $3m threshold

Binding and Non-Binding Death Benefit Nominations

Given these proposed changes, your approach to death benefit nominations—whether binding or non-binding—must be recalibrated:

• Binding Death Benefit Nominations: Legally oblige the trustee to pay the benefit as directed. However, directing all benefits to one person may inadvertently create Division 296 exposure.

• Non-Binding Nominations: Give trustees discretion to consider the tax impact and may allow flexibility in distributing benefits to multiple recipients.

Pros and Cons of Nomination Types

Nomination Type	Pros	Cons
Binding	Certainty and enforceability	Potential for unintended tax consequences
Non-Binding	Flexibility to adapt based on tax or family needs	May not be followed; risk of challenge

Strategic Considerations

• Splitting Benefits: Consider strategies that split death benefits among multiple beneficiaries to avoid pushing any one individual over the $3 million threshold.

• Reviewing Reversionary Pensions: Automatic reversion to a spouse may push their total super balance above the cap. While reversionary pensions typically count towards the recipient’s transfer balance cap 12 months after death, this grace period still requires planning for Division 296 purposes.

• Asset Valuations: With auditors now required to scrutinise valuations closely, ensuring accurate and timely valuations is critical for tax planning and compliance.

• Equalising Balances: Proactively managing balance equalisation between spouses before retirement or death can reduce exposure.

• Alternatives to Super: Using family or testamentary trusts to receive lump sums may improve estate flexibility and avoid Division 296 consequences.

• Interaction with Death Benefit Tax: Where death benefits are paid as lump sums to adult children or other non-tax dependants, standard death benefit taxes may apply in addition to any Division 296 exposure.

The Urgent Need for Proactive Planning

Division 296 is not just another layer of tax complexity—it fundamentally alters the estate planning equation for SMSF members in Australia. The window for strategic planning may be narrow, particularly if legislative changes are implemented retrospectively or with little lead time.

Conclusion

The proposed Division 296 tax means that what worked yesterday may no longer protect your family tomorrow. Estate planning for SMSFs is now an important issue that demands bespoke legal advice and forward-thinking strategies to ensure your intentions are honoured—tax-effectively and with certainty—in Australia.

For a comprehensive review of your SMSF estate planning arrangements, including binding and non-binding death benefit nominations or pension documentation, timely action is essential. Don’t leave your legacy to chance or expose your loved ones to unnecessary tax. 

Contact Hill Legal today on 03 5976 6500 or send us a message to review your SMSF estate planning arrangements, including binding and non-binding death benefit nominations, or your pension documents as to whether they should be reversionary or non-reversionary. Our expert team will help you navigate the new landscape, protect your beneficiaries, and ensure your intentions are honoured—tax-effectively and with certainty.