Division 296 will become law in the 30 June 2027 financial year, but Trustees may need to make an important decision much earlier: A key issue within the transitional CGT relief is how to deal with assets that are standing at an unrealised loss.
The key considerations:
Division 296 CGT cost base reset election: operation and effect on SMSF assets from 30 June 2026
The election allows the fund to reset the cost base of its assets to their 30 June 2026 market value (for Division 296 purposes only). That is, gains accrued up to 30 June 2026 are excluded from the Division 296 earnings calculation when the asset is sold. However, for ordinary CGT purposes, the cost bases of the assets remain unchanged, leaving the fund to maintain two cost base ledgers, one for the actual cost base for CGT, and other for reset cost base for Division 296.
The election applies to all Fund assets. Either the entire fund portfolio at 30 June 2026 is elected or the Fund makes no election at all. Once made, the election cannot be revoked.
Division 296 CGT cost base reset election: assets held at an unrealised loss
For assets carrying an unrealised loss, the reset substitutes a lower cost base than what the Fund paid, being the 30 June 2026 market value, as the Division 296 cost base. Should that asset recover in the future, the subsequent gain in value is captured as a Division 296 gain, an outcome essentially ‘penalising’ the election choice.
A fund holding loss assets therefore faces an important choice:
– Crystalise their losses on the investment, that is, realise the loss before 30 June 2026, turning the investment loss to a tangible benefit, a carried forward capital loss under the ordinary CGT rules, or
– make the election and accept a reduced cost base on those assets which may have a negative outcome if the asset recovers.
Where in the past, wating for an investment to recover from a loss position may have been a viable option, trustees with Division 296 in mind are now called to take a position on assets in a loss position in anticipation of these rules.
Division 296 CGT cost base reset election: election criteria
Is this an issue only for Funds with members with super balances over $3M? The short answer is No! The eligibility to make the election, is in fact open to all Funds. Therefore, if the fund holds assets with significant unrealised gains and there is anticipation a member may be in scope of Division 296 in the future whilst still holding said assets, the election can be made. Therefore, trustees not immediately impacted by Division 296, can consider resetting the cost bases of assets at 30 June 2026.
All trustees must turn their minds to the treatment of any loss assets within the fund before 30 June 2026 with the reset becoming a one off decision for every fund with Division 296 exposure.
Co-authored by Kumbi Mukaro, Manager, Business Advisory