With the anticipated introduction of the proposed Div 296 tax, SMSF trustees and their advisers face significant new considerations for the 2025-26 income year and beyond. The Div 296 tax is set to impose an additional 15 per cent tax on individuals whose total superannuation balance exceeds $3 million, based on the movement in that balance between 30 June 2025 and subsequent 30 June dates. This measure squarely puts the spotlight on how SMSF member balances are determined and reported, and the timing of any transition to tax effect accounting becomes critical.

Why Tax Effect Accounting Matters

Traditionally, many SMSFs have not applied tax effect accounting (TEA) in their financial statements. However, TEA aligns the carrying value of assets with their underlying tax attributes, most importantly recognising deferred tax liabilities (or assets) that arise where the asset’s market value diverges from its income tax cost base (e.g. unrealised capital gains). From an accounting perspective this is referred to as the ‘matching principle’. The methodology used when preparing the annual financial statements and member balances feeds directly into the SMSF annual return, and ultimately, the calculation of each member’s total superannuation balance.

This is particularly relevant for the Div 296 tax, which compares superannuation balances at 30 June 2025 and 30 June 2026 to determine the increase in earnings for individuals above the $3 million threshold.

Consequently, preparers of SMSF annual financial statements and in particular the SMSF annual return (SAR), should ensure that they understand:

• The definition of total superannuation balance (TSB).
• How the ATO calculates TSB and where it gets the information to allow them to perform the calculation.
• How the TSB information is reported in the SMSF annual return and whether the amount pre-populated by the SMSF administration platform does indeed equate to TSB, and if not, how to report the correct amount for TSB.
  
  

The Importance of Timing

The central question for SMSFs: when should TEA be adopted if it is to be implemented for the first time?

The answer: ideally for the financial statements prepared for the 2024-25 income year, the year immediately prior to the commencement of Div 296.

There are two critical reasons for this timing:

1. Alignment of Calculation Methodology
   The Div 296 tax is calculated by reference to the movement in total superannuation balance between two points in time. If TEA is adopted in 2024-25, then both the 30 June 2025 and 30 June 2026 balances will be determined on a consistent basis, ensuring comparability. This eliminates distortions that could otherwise arise if different accounting treatments are used for the two years.
2. Avoiding Over or Understatements
   If an SMSF defers TEA until 2025-26, the 30 June 2025 closing balance (as reported in the SMSF annual return) would not reflect deferred tax liabilities, unless the pre-populated figure is effectively manually overridden by including the correct TSB figure in the Member Section of the SAR.
   
   

Where market values are materially above CGT cost base, this can overstate member balances for 2025, as unrealised capital gains are not adjusted for potential tax obligations. When TEA is first applied in the 2025-26 year, the 30 June 2026 balance will reflect this adjustment, artificially deflating the reported growth in balance, and, in turn, understating the Div 296 tax liability. In effect, the member’s increase in superannuation balance (and thus their Div 296 tax exposure) will appear lower than it actually is, due to presenting the two years’ balances on an inconsistent basis.

Conversely, adopting TEA for the 2024-25 income year ensures both opening and closing balances for the Div 296 calculation are prepared under the same methodology, avoiding mismatches and potential scrutiny.

Key Takeaways for SMSF Trustees and Accountants

• If an SMSF is considering adopting tax effect accounting for the first time, the financial statements for the 2024-25 income year are the critical starting point.
• Aligning the accounting approach for the closing balance on 30 June 2025 with that used for 30 June 2026 ensures consistency and avoids distortions in Div 296 calculations.
• Delayed adoption risks understating Div 296 tax liability due to inconsistent measurement bases for total superannuation balance between the relevant years.
• Proactive implementation provides clarity, confidence and compliance in readiness for the new tax regime.
  
  

With substantial tax consequences riding on the proper measurement of superannuation balances, now is the time for SMSF trustees and their advisers to review their accounting policies and prepare for the year ahead.

For further discussion on TSB and why it’s not just a Div 296 consideration refer to my separate article ‘Understanding Total Superannuation Balance: Refocusing as the $3 Million Threshold Approaches’ which was first published in self managed super e-magazine, issue #50.

Tax effect accounting will be an important consideration and focus on the 2024-25 compliance season. Join us for the full day event where you have the choice of SMSF and Tax streams, in-person or online, with up to 10.5 CPD hours.

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