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Five Questions to Ask Before Making the Cost Base Election
The recent introduction of Division 296 means SMSF trustees have a one-off opportunity to make the cost base election for assets held by the fund on 30 June 2026 or not.
It may appear to be straightforward for some; if an asset has significantly increased in value since it was purchased, resetting its cost base to its 30 June 2026 market value can prevent the capital growth that occurred before 1 July 2026 from being included in future Division 296 calculations.
However, trustees must also consider what happens if the asset is sold in the future, as well as the impact upon all assets held by the SMSF. For those holding long-term investments like property, shares or other assets with significant gains or losses, understanding the interaction between the cost base election and a future sale is critical for minimising tax and long-term performance of the fund.
Recapping: What’s the Division 296 cost base election?
Division 296 introduces a new, additional tax on certain superannuation earnings where an individual's total super balance exceeds one of two thresholds: for the 2026–27 financial year, the “large” super balance threshold is $3 million, while the “very large” super balance threshold is $10 million.
This means that earnings attributable to balances between $3 million and $10 million are subject to an additional 15% tax, while earnings attributable to balances over $10 million are subject to an additional 10%, resulting in total concessional tax rates of 30% and 40% respectively. These thresholds are also indexed.
For SMSFs, a special transitional rule allows trustees to make a one-off cost base election for CGT assets held by the fund at 30 June 2026. Where the election is made, the asset's market value at the end of 30 June 2026 becomes the first element of its cost base, or reduced cost base for the purposes of calculating Division 296 fund earnings. Other elements of the historical cost base are effectively wiped or disregarded for this calculation.
This means that, for Division 296 purposes, growth that occurred before 1 July 2026 can effectively be quarantined. Importantly, however, this does not reset the asset's ordinary CGT cost base; the original tax cost base remains relevant when the SMSF calculates its ordinary capital gain or loss when the asset is eventually sold.
The election must be made by the due date of the SMSF's 2026–27 annual return and, once made, cannot be revoked.
Reasons why an SMSF trustee may make the cost base election
Consider an SMSF that purchased a commercial property for $1 million several years ago that, by 30 June 2026, is worth $2.5 million. This means the SMSF has increased in value by $1.5 million since the property was purchased, so, if the trustee makes the Division 296 cost base election, the property's cost base for Division 296 purposes becomes $2.5 million.
If the property is subsequently sold for $3 million, the Division 296 calculation can effectively start with the $2.5 million 30 June 2026 value, rather than the original $1 million acquisition cost. This means the $500,000 of growth occurring after 30 June 2026 is the relevant post-election growth, rather than the entire $2 million increase since the property was acquired.
The election, therefore, can be particularly valuable for SMSFs holding assets that have accumulated substantial gains over many years. We’ve previously covered how the cost-base reset is an important planning consideration for SMSFs with large, unrealised gains for trustees set to be close to Division 296 thresholds.
But what happens when the asset is sold?
Trustees need to be particularly careful at the point of sale of an asset held by an SMSF. By electing for the cost base reset, this doesn’t mean that the SMSF's ordinary capital gain disappears. Rather, it is simply an adjustment for the Division 296 calculation.
To explain using the previous example, the property's original tax cost base remains $1 million for ordinary CGT purposes. If the property is eventually sold for $3 million, the SMSF's ordinary CGT calculation would still generally start with the relevant original cost base of $1 million, subject to the normal CGT rules. Meanwhile, the Division 296 calculation is separate.
Is the election actually a tax saving?
Making the cost base election can save trustees unwanted tax, but it is important to be precise with planning, keeping in mind that the election does not eliminate tax on the historical capital gain. Instead, it can simply prevent pre-1 July 2026 growth from being included in future Division 296 fund earnings.
The potential benefit of the cost base election becomes more significant where:
- the asset has been held for many years
- there is a substantial gain at 30 June 2026
- the SMSF is likely to remain subject to Division 296, and
- the fund holds assets with significant accrued gains that may subsequently be realised.
For these trustees, the election may protect a significant amount of historical growth from being relevant to future Division 296 calculations.
What if the SMSF plans to sell the asset soon?
The expected timing of a sale is an important part of the decision. However, a planned sale shortly after 30 June 2026 does not necessarily mean the cost base election will have limited value.
For example, if an asset was originally acquired for $1 million and is worth $2.5 million at 30 June 2026, a substantial amount of growth has already occurred before Division 296 commenced. If the asset is subsequently sold, the election may still be relevant because of that historical gain.
The timing of a sale should therefore be considered alongside the amount of growth accumulated by 30 June 2026, the member's Division 296 position and the fund's overall portfolio.
Remember, the election applies across the fund
Another important consideration is that trustees cannot simply choose the individual assets on which they want the election to apply. Rather, the election impacts all of the fund's relevant CGT assets. The legislation also makes the election a significant long-term decision because the choice is not something trustees should treat as an easily reversible planning strategy.
This means trustees need to look beyond the asset with the largest capital gain and rather, consider the entire portfolio. For example, an SMSF could hold a commercial property with a $1 million unrealised gain, shares with a $300,000 unrealised gain, and another investment currently sitting on an unrealised loss. The entire portfolio needs to be considered when assessing the potential consequences of making the election.
What about assets that have fallen in value?
Losses on assets held by the fund are another reason not to make the decision based solely on the SMSF’s largest capital gain. Trustees must also consider the effect of the election on assets that are currently worth less than their historical tax cost because the rules also deal with the reduced cost base.
This is particularly relevant where an SMSF has a diversified portfolio containing property, listed investments and other CGT assets with very different performance histories.
Five questions to ask before making the cost-base election for your SMSF
1. How much growth occurred before 1 July 2026?
The greater the historical gain, the greater the potential significance of resetting the Division 296 cost base.
2. When are those gains likely to be realised?
Consider when assets may be sold or otherwise subject to a CGT event and how this could affect the fund's Division 296 position.
3. When is the asset likely to be sold?
The timing of a planned sale should be considered alongside the amount of accrued growth at 30 June 2026 and the member's Division 296 position.
4. What other assets does the fund hold?
The decision needs to be considered across the fund's portfolio rather than looking at individual investments in isolation.
5. Is the member likely to remain subject to Division 296?
Division 296 is based on an individual's total super balance and circumstances, not simply the value of one SMSF asset.
The ATO confirms that SMSFs need to consider members' total superannuation positions when determining whether Division 296 reporting and tax may apply.
Don't make the decision based on today's balance alone
One of the biggest traps for trustees is assuming that the election only matters if a member is already above the $3 million threshold. This approach to the decision may be too short-sighted.
To explain: an SMSF might currently be below the threshold but hold a property or share portfolio with substantial accumulated gains. Future investment growth could push the member's total super balance above the relevant threshold.
The election is therefore a long-term planning decision, particularly for SMSFs holding assets that have accumulated value over many years.
This article is intended as general information only and does not constitute financial, tax or investment advice. SMSF trustees should obtain professional advice based on their individual circumstances before making a Division 296 cost base election.
