A practical guide to how SMSF trustees can be proactive.

SONAS WEALTH  |  THE SMSF COACH

SMSF TRUSTEE EDUCATION SERIES

By Liam Shorte  |  Fellow SMSF Specialist Advisor™  |  Financial Planner

The most valuable planning happens before 1 July 2027 — and the single best lever, equalising balances between spouses, closes the moment one of them dies. What follows is general information for advisers and trustees, not advice on any particular fund.

Equalise balances while both spouses are alive

Division 296 measures each member as an individual, not the couple as a unit. A couple each holding $2.5 million sits entirely below the threshold. The same $5 million held by one spouse, with the other on nothing, exposes around $2 million to the extra tax for no reason other than how the money is split. While both spouses are alive and both can still receive contributions, that split is movable: contribution splitting of concessional contributions to the lower-balance spouse, recontribution after a withdrawal, directing future contributions toward the spouse with room, and the spouse contribution all push the balances toward the middle.

The hard deadline is the first death. When a spouse dies, their balance must leave the super system or convert to a death benefit pension for the survivor — it cannot be split back to even the couple out. A death benefit pension counts toward the survivor’s own balance, so a survivor who inherits a large benefit can be carried well above $3 million with no mechanism left to unwind it. Equalisation is the cheapest Division 296 strategy on the table, and it has an expiry date nobody can forecast. Treat it as the first conversation, not the last.

Move capital to the next generation

A parent who has met a condition of release can take money out of super entirely, lend it to adult children, and have the children recontribute it as non-concessional contributions. The capital shifts into balances sitting far below any Division 296 threshold while staying inside the family. Document the loans as loans: written agreements, terms stated, repayable on demand or on the parent’s death. Pair that with a non-lapsing binding death benefit nomination directing the child’s remaining super to their estate, and a will that controls where it lands (loan can be repaid to parent’s), so the capital stays in the bloodline rather than leaking to a child’s former partner.

The numbers reward acting across the indexation step. Take a parent with $4 million and two adult children. Before 30 June 2026, the parent withdraws $240,000 and each child contributes $120,000 as a non-concessional contribution under the 2025/26 cap. Once the cap indexes to $130,000 on 1 July 2026, the parent withdraws a further $1,050,000: each child contributes $130,000 in 2026/27, then triggers the bring-forward in 2027/28 to contribute $390,000 — three years at the indexed $130,000 cap. That is $640,000 into each child, $1.28 million across the two, with the children’s balances needing to be under the relevant total super balance threshold of $2.1 million for the full bring-forward to be available. The parent’s balance falls from about $4 million to roughly $2.71 million by the 30 June 2027 measurement date — under the threshold for the transitional first year, so no Division 296 reaches them for 2026/27 at all.

Commute and recontribute to reset components and protect the survivor

Pension commutation paired with recontribution does two jobs in one move. Withdrawing a taxable-heavy benefit and recontributing it as a non-concessional contribution lifts the tax-free proportion of the balance, which matters most for the death benefits tax a non-dependant child would otherwise wear. Run across a couple, the same mechanic feeds the equalisation work above: commute from the higher-balance spouse, recontribute to the lower, and the components improve while the balances even out. The window is the period while both members are alive and both can still receive contributions. Once a member can no longer contribute, the lever is gone, so the sequencing of commutations against age and contribution eligibility needs to be mapped years ahead, not in the final return.

Direct death benefits out of super

The default outcome — a death benefit pension to the surviving spouse — is exactly the thing that compounds a survivor’s balance toward Division 296. The alternative is to direct the death benefit out of the super system to the estate, through a binding nomination, and have a testamentary trust receive it. The capital then sits outside super entirely, the survivor’s own balance keeps compounding only on its own earnings, and the testamentary trust can stream income to beneficiaries on favourable terms, including to minor children at adult marginal rates.

The trade-off is real and has to be priced. Money paid to the estate loses the concessional super earnings rate and any tax-free pension treatment it would have carried inside super. So this suits couples whose survivor is already near or above the threshold, where the saving on future Division 296 outweighs the earnings tax given up — not couples with room to spare, who are better off keeping the benefit in the concessionally taxed environment. The decision turns on the survivor’s projected balance, not a general preference for keeping money in super.

Use the cost base election deliberately, and watch the loss trap

SMSFs get a one-off election to reset the cost base of fund assets to market value as at 30 June 2026 for Division 296 purposes. For a fund sitting on large unrealised gains, resetting lifts the starting point so that future realised earnings — and the Division 296 they attract — are measured from the higher base. The catch is that the election is all or nothing across the fund’s assets, and that is where it bites. A fund holding some assets above cost and others below cost cannot cherry-pick the winners. Electing to reset also locks in the lower market value on the loss-position assets, raising the future taxable gain on those when they recover. Model the whole portfolio before electing, not the assets in profit alone, and check the lodgement deadline — the election is made by the due date of the 2026–27 return and cannot be reversed once in.

Manage realised earnings and asset location above $3 million

Once a balance sits well above $3 million and equalisation has run out of room, the question becomes when earnings are realised and where the assets are held. Division 296 taxes realised earnings, which makes the timing of asset sales a tax decision rather than purely an investment one. Deferring a realisation defers the liability, and bunching gains into a year a balance happens to sit below the threshold can sidestep it altogether. Asset location is the other half of the answer: high-growth, frequently traded assets inside a large super balance manufacture the realised earnings Division 296 feeds on, while the same assets held outside super — in the member’s own name, a family trust, or an investment bond — stay out of the calculation entirely.

This is where the transfer balance cap and Division 296 pull against each other. The transfer balance cap, now $2.1 million, rewards moving as much as possible into the tax-free pension phase to minimise earnings tax. But every dollar in pension phase still counts toward the $3 million Division 296 balance. A member who maxes their pension transfer to cut earnings tax can find that same balance sitting squarely inside Division 296’s reach. The two caps are not reconciled with each other; you choose which one to optimise, fund by fund, member by member.

None of these levers stay open forever. The cost base election closes with the 2026–27 return, the indexation step is a one-time uplift you either use or lose, and equalisation ends at the first death. The cost of waiting is not theoretical — it is a balance that has hardened above the threshold with nothing left to move it.

Are you looking for advisors that will keep you up to date and provide guidance and tips like in this blog? then why not contact us at our Castle Hill or Windsor office in North West Sydney to arrange a one-on-one consultation, just click the Schedule Now button up on the left to find the appointment options.

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Liam Shorte B.Bus FSSA™ AFP

Financial Planner & Fellow SMSF Specialist Advisor™

      

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Important information

This article is general information only and does not constitute personal financial, legal, or taxation advice. The rules governing self-managed superannuation funds are complex and fact-specific. Individual circumstances vary significantly, and the application of the rules described in this guide depends on facts that can only be properly assessed by a qualified professional. Before establishing or participating in a structure of this type, seek advice from a licensed SMSF adviser and an experienced tax lawyer. Past tax outcomes are not a guide to future tax treatment.