The most controversial feature of the original Division 296 proposal, a tax on unrealised gains, did not survive. The version now in force from 1 July 2026 taxes realised earnings, calculated from an adjusted measure of fund taxable income. For SMSF trustees holding property, shares or other growth assets, knowing what counts as earnings, and how the one-off cost base election works, may shape decisions made during this first income year.

From the 2023 proposal to the enacted law

When the tax was first proposed in 2023, the Earnings measure would have captured increases in asset values even where nothing had been sold. In principle, that could have left SMSF members whose funds hold farmland, Business real property or other Illiquid Assets facing tax bills on paper gains, without any sale proceeds available to pay them.

The revised law passed by Parliament takes a different path. that the original version taxed unrealised gains but the version passed does not. The tax now applies from 1 July 2026, with thresholds of $3 million and $10 million.

What counts as earnings

According to the ATO, SMSFs calculate Division 296 fund earnings for each income year, described as an adjusted amount of fund taxable income. A share of that amount is then attributed to each in-scope member.

Technical guidance states that the broad building blocks. Earnings include taxable Investment income such as rent, interest and dividends, including franking credits. They also include net realised capital gains, after capital losses and after the one-third discount available to super funds on assets held for more than 12 months. Tax-deductible expenses are subtracted.

Several items are treated differently from ordinary fund tax. Concessional contributions are ignored, so employer and deductible personal contributions do not count as earnings. Available analysis notes that the exemption for pension income is disregarded, meaning earnings supporting retirement phase pensions are still counted for Division 296 purposes. Fund earnings cannot fall below zero.

Why realised gains change the picture

Under the revised approach, a rise in the value of a fund's property or share portfolio does not by itself create Division 296 earnings. A Capital Gain generally becomes relevant when the asset is sold and the gain is realised.

That makes the timing of asset sales an important variable. A fund with steady income and no asset sales may report modest earnings, while a year with a large disposal could produce a much higher figure.

Earnings are then shared among members. The ATO says an actuary generally needs to be engaged to determine the amounts attributable to each member, and this typically uses an average Account Balance method.

The cost base election

Because only realised gains count, the law gives SMSFs and other small funds a transitional choice. Trustees may elect to reset the cost base of the fund's CGT assets to their Market Value at the end of 30 June 2026, for Division 296 purposes.

According to the ATO, the election must be made by the due date of the fund's 2026–27 annual return, cannot be revoked and does not need to be provided to the ATO. Records must be retained for five years after it becomes certain no further CGT events can occur.

SMS Magazine reports the election must apply to all CGT assets held by the fund at 30 June 2026. It is therefore all or nothing, including assets that may be sitting at a loss.

As a hypothetical example, the effect with a hypothetical property bought in 2015 for $1 million, valued at $2 million at 30 June 2026 and sold in 2028 for $2.5 million.

For ordinary fund tax, the $1.5 million gain is reduced by the one-third discount to $1 million. For Division 296 purposes with the election, the cost base becomes $2 million, so the gain is $500,000, reduced by the discount to about $333,000.

Without the election, the Division 296 earnings from that sale would be based on the full $1 million discounted gain. The difference shows why the decision may be significant for funds with large accrued gains.

It is also noted that any SMSF can make the election, even if no member currently has more than $3 million.

How many funds may be affected

According to the Class 2026 Annual Benchmark Report, reported by SMS Magazine, 72.8 per cent of SMSFs on its platform had positive net unrealised capital gains positions at 30 June 2026. Among funds with at least one member above $3 million, 95.4 per cent were in a positive position.

The same report found the average unrealised gain for funds in a positive position was $620,000. Class chief executive Tim Steele described it as "a quite complex decision" requiring research by trustees.

A practical challenge is valuation. Trustees need market values at 30 June 2026, which SMS Magazine notes may be difficult to determine retrospectively. That may be especially relevant for funds holding unlisted assets or property.

What trustees may want to consider

Whether the election suits a particular fund may depend on the mix of assets, the size of accrued gains and losses, members' likely balances and the fund's plans for future sales. Because it is irrevocable and covers every asset, it may reward careful analysis.

Trustees may also wish to review how earnings will be recorded, how members' shares will be determined by an actuary and how the new reporting will fit into the annual return. The ATO says in-scope members' earnings must be reported from 2026–27 onwards.

The bottom line

The enacted Division 296 tax does not tax unrealised gains. It is based on realised earnings, drawn from an adjusted version of fund Taxable Income that includes investment income and net realised capital gains, excludes concessional contributions and ignores the pension exemption. For SMSFs, the one-off, all-or-nothing cost base election at 30 June 2026 adds a significant decision with lasting consequences, due by the 2026–27 annual return date.