How Division 296 Is Reshaping Fund Strategies for Business Owners

SMSFs Respond to Div 296

The introduction of Division 296 is prompting many self-managed super fund (SMSF) members to rethink their strategies. Some are reducing their balances to limit exposure, while others are exploring ways to move funds into more flexible structures outside of super. The core issue is that tax is being applied to unrealised gains — hypothetical increases in value that don’t generate actual income. This means many taxpayers are being asked to pay tax without receiving any additional cash, which is causing concern across the sector.

Fairness and Practicality Concerns

There’s strong frustration over the lack of balance in how Division 296 applies. If investments drop in value, there's no deduction or refund for unrealised losses. This asymmetry feels unjust to many, especially given the complexity of the rules. Even advisers are struggling to explain the mechanics of the tax, and many expect system-wide costs to rise as funds adapt — regardless of whether they’re affected.

Alternative Structures Outside Super

As a result, more families are considering how to manage wealth outside of super. Family discretionary trusts (FDTs) remain a preferred vehicle, offering flexibility in income distribution, capital gains management, and succession planning. Although legislative scrutiny of FDTs has increased over time, they still play a key role in managing assets securely and strategically for the long term.

Corporate Entities in Tax Planning

Many families are using corporate entities as part of a broader planning approach. An FDT may hold shares in a corporate beneficiary to access the 30% company tax rate. This setup enables income splitting and allows for strategic distribution of gains and franked dividends. While more complex, this structure can be tailored for flexibility and long-term savings — provided appropriate compliance and documentation are in place.

Estate Planning Under the Spotlight

Division 296 is also prompting a wider review of estate and succession plans. Some investors are holding off on major changes this year and reassessing their position annually. But with potential tax on super death benefits passed to adult children, the long-term value of super is being questioned. Families are using this moment to ensure their planning is in order and fit for unexpected events.

Tax Reform and Future Considerations

Division 296 could signal a broader shift in tax policy. What was once considered politically untouchable — taxing unrealised gains — is now a reality. Business owners and investors are right to consider the possibility that similar rules might eventually apply to other assets such as trusts, companies or even property. In a changing landscape, proactive, flexible planning is more important than ever.

To explore how Division 296 could impact your structure or to review your planning options, contact Lockwood & Ward on (02) 9299 7044, visit www.lockwood.com.au, or stop by Level 9, 50 Clarence Street, Sydney NSW 2000.