For couples with significant superannuation balances, estate planning decisions that once focused mainly on simplicity, certainty and tax-effective income are becoming more complicated following the introduction of Division 296 tax.

Division 296 is now law and applies from 1 July 2026. For the 2026–27 financial year, an additional 15% tax can apply to taxable superannuation earnings attributable to the portion of an individual’s total superannuation balance above the $3 million large super balance threshold.

For couples who each have balances approaching $3 million, the death of one spouse could therefore create an important tax consequence for the survivor. In particular, whether a pension is reversionary or non-reversionary can affect when the deceased spouse’s superannuation becomes part of the surviving spouse’s total super balance.

This does not necessarily mean that reversionary pensions should be cancelled. They continue to offer important estate planning benefits. However, Division 296 adds another factor that should now be considered when reviewing pension and death benefit arrangements.

Understanding the Two Different Superannuation Limits

An important starting point is understanding the difference between the transfer balance cap and total superannuation balance.

Although the two measures are related to superannuation, they serve very different purposes.

The transfer balance cap limits how much an individual can transfer into the tax-free retirement phase. Your total superannuation balance, or TSB, broadly measures the value of your superannuation interests and is used for a range of superannuation rules, including Division 296. The ATO calculates an individual’s TSB each year for these purposes.

This distinction becomes particularly important when one member of a couple dies.

What Happens With a Reversionary Pension?

A reversionary pension is structured so that, when the original pensioner dies, the pension automatically continues to an eligible nominated beneficiary, commonly their spouse.

One of the major advantages is certainty. Rather than the pension stopping and the trustee subsequently determining how the death benefit should be dealt with, the pension automatically continues to the surviving spouse.

There is also an important transfer balance cap concession.

Where a reversionary pension passes to a spouse, the transfer balance credit arising from the inherited pension is generally delayed for 12 months. The ATO explains that the purpose of this delay is to give the surviving beneficiary sufficient time to restructure their superannuation affairs if necessary.

However, the Division 296 treatment is different.

For total super balance purposes, the inherited reversionary pension can become attributable to the survivor immediately.

That distinction creates the potential problem.

A surviving spouse may receive 12 months to address their transfer balance cap position, but they do not necessarily receive the same 12-month period before the inherited pension affects their total super balance for Division 296 purposes.

An Example: Two $3 Million Pension Balances

Consider a couple who each have approximately $3 million in superannuation pensions.

If both pensions are reversionary to each other and one spouse dies during 2026–27, the deceased member’s $3 million pension could immediately become part of the surviving spouse’s superannuation position.

The survivor could therefore have a total super balance of approximately $6 million.

This becomes particularly significant because 2026–27 is the first year Division 296 applies. The ATO confirms that, for the first year, the relevant TSB test is based on the member’s position at the end of the income year.

If the survivor therefore holds approximately $6 million at 30 June 2027, they may have a Division 296 liability attributable to earnings on the portion of their superannuation above the $3 million threshold.

The exact liability would depend on their actual balance, taxable super earnings and the Division 296 calculation rather than simply applying 15% to the excess balance itself.

What Changes With a Non-Reversionary Pension?

A non-reversionary pension operates differently.

Rather than automatically continuing to a spouse, the pension generally ceases when the pensioner dies. The deceased member’s superannuation death benefit must then be dealt with by the trustee.

For an eligible spouse, one option may be to commence a new death benefit pension.

The important difference for Division 296 planning is timing.

The new death benefit pension does not become the survivor’s pension until it is actually commenced. Consequently, if the original pension is non-reversionary and the death benefit pension is not commenced until after the end of the financial year, the inherited amount may not form part of the survivor’s TSB at that earlier 30 June.

This could potentially defer the Division 296 impact.

It is not an automatic strategy, however. Death benefits must be dealt with as soon as practicable, and intentionally delaying the administration of a death benefit simply to obtain a tax advantage may not be appropriate.

How the Timing Could Work

Return to the couple with approximately $3 million each.

Assume one spouse dies in March 2027.

Reversionary pension

If the deceased’s $3 million pension automatically reverts to the survivor, the survivor could have approximately $6 million attributed to them by 30 June 2027.

That could expose the survivor to Division 296 in 2026–27.

Non-reversionary pension

If instead the pension ceases on death and the trustee does not commence the new death benefit pension until after 1 July 2027, the survivor may still have only their original approximately $3 million balance at 30 June 2027.

Depending on their exact balance and earnings, this could result in little or no Division 296 liability for 2026–27.

The inherited pension would then commence in the following financial year.

The difference is not that the inheritance permanently avoids Division 296. Rather, the timing potentially creates an additional planning window.

Why the Date of Death Matters

This strategy becomes much less straightforward when death occurs earlier in the financial year.

For example, if a member dies in August, it may be difficult to justify not dealing with the death benefit before the following 30 June.

Even a December death may provide enough time for a trustee to process the benefit.

By contrast, a death occurring relatively close to 30 June could naturally result in the administration of the new pension extending into the following financial year.

The practical result therefore depends on circumstances including:

• when the member dies;
• how quickly the trustee processes the death benefit;
• whether the fund is an SMSF or APRA-regulated fund;
• whether all required documentation is available;
• the surviving spouse’s transfer balance cap position; and
• whether the death benefit will be paid as a pension or lump sum.

The timing should reflect genuine administration of the death benefit, rather than an artificial delay designed purely around tax.

Why the Strategy Can Be More Controllable in an SMSF

An SMSF can potentially provide greater control over timing because the surviving spouse may also be a trustee or director of the corporate trustee.

This can allow the family and their advisers to coordinate the death benefit, transfer balance cap, Division 296 and estate planning consequences more closely.

However, greater control does not mean unlimited discretion.

Trustees still need to comply with the fund’s trust deed, pension documentation, death benefit rules and their obligation to deal with benefits appropriately.

For this reason, the strategy should generally involve the financial adviser, SMSF accountant and estate planning lawyer working together.

APRA Funds Present a Different Consideration

With an industry, retail or other APRA-regulated super fund, the surviving spouse generally has much less control over how quickly the trustee processes the death benefit.

This creates both an opportunity and a risk.

If the trustee does not commence the new death benefit pension until the following financial year, the delay may assist from a Division 296 perspective.

However, relying on administrative delays is not a robust financial planning strategy.

A reversionary pension may provide significantly greater certainty because the income stream passes automatically to the surviving spouse rather than requiring the trustee to process a new death benefit pension.

For many clients, that certainty may be more valuable than the possibility of temporarily delaying Division 296.

There Could Also Be Contribution Opportunities

The timing of an inherited pension can affect more than Division 296.

Consider another couple with $2 million pension balances each.

Suppose one spouse dies in May 2027 and the survivor is still eligible to make superannuation contributions.

If the deceased’s pension is reversionary, the survivor could have a total super balance of approximately $4 million at 30 June 2027.

That could prevent the survivor from making certain non-concessional contributions in the following year.

By comparison, if the pension is non-reversionary and the death benefit pension is not commenced until after 30 June, the survivor may still have a TSB of approximately $2 million at the measurement date.

Depending on the contribution thresholds and eligibility rules applying at that time, this could preserve a final contribution opportunity.

This can be particularly valuable where a surviving spouse has substantial assets outside superannuation and would otherwise have lost their opportunity to contribute further capital to the super system.

But Tax Deferral Is Not the Only Consideration

Cancelling a reversionary pension purely because of Division 296 could create unintended consequences.

One of the most important considerations is the tax treatment of investment earnings supporting the deceased member’s pension.

A non-reversionary pension ceases on death. Pension-phase tax treatment can continue for a period while the death benefit is being dealt with, provided the benefit is handled as soon as practicable, but the rules are technical.

If changing the pension structure results in more investment earnings ultimately being taxed within the fund, the additional tax cost could outweigh the Division 296 tax being deferred.

This means the decision should be modelled rather than assessed solely on the Division 296 outcome.

Transfer Balance Cap Planning Still Matters

Even if a non-reversionary structure is used, the surviving spouse cannot simply retain unlimited amounts in the tax-free pension environment.

When the death benefit pension is eventually commenced, it counts toward the survivor’s transfer balance account.

If the survivor does not have sufficient transfer balance cap space, they may need to restructure their existing retirement income streams.

In some circumstances this could involve commuting part of their own pension back to accumulation or withdrawing amounts from the superannuation system so there is sufficient cap space to receive the death benefit pension.

A deceased person’s superannuation generally cannot simply remain indefinitely within super without being dealt with.

The Division 296 strategy therefore needs to be considered alongside the transfer balance cap rather than in isolation.

Reversionary Pensions Still Have Significant Advantages

Despite the potential Division 296 timing benefit of a non-reversionary pension, there are several reasons clients may still prefer reversionary arrangements.

They can provide:

• greater certainty that the pension will continue to the intended spouse;
• continuity of pension payments after death;
• less dependence on trustee processing time;
• reduced trustee discretion where the pension validly reverts automatically; and
• simpler administration for a surviving spouse during what may already be a difficult period.

For many couples, these estate planning benefits could outweigh a potential one-year Division 296 deferral.

This can be particularly relevant for members of large APRA-regulated super funds where they do not control the trustee.

Binding Death Benefit Nominations Are Not Automatically Better

Replacing a reversionary pension with a binding death benefit nomination should therefore not be viewed simply as a tax strategy.

A binding death benefit nomination can provide important estate planning certainty where it is valid and correctly drafted.

However, unlike an automatic reversionary pension, the trustee may still need to process and implement the nominated death benefit.

Fund-specific rules also matter.

Before making changes, clients should confirm that their nomination is valid, whether it lapses, whether it appropriately directs the form of the death benefit and whether it remains consistent with their broader estate plan.

Division 296 Adds Another Layer to Estate Planning

Historically, decisions about reversionary pensions were heavily influenced by transfer balance cap planning, estate planning certainty and the tax treatment of pension earnings.

Division 296 introduces another variable.

For couples with large super balances, the questions now include:

What will the survivor’s total super balance be immediately after death?

Could the timing of a death benefit pension affect Division 296?

Will the survivor have sufficient transfer balance cap space?

Could delaying the inherited pension preserve a contribution opportunity?

What tax concessions might be lost by changing the pension structure?

Who controls the timing – the family or an APRA-regulated trustee?

Is the existing binding death benefit nomination actually valid and appropriate?

These questions need to be assessed together.

Should You Cancel a Reversionary Pension?

There is no universal answer.

For some couples close to the $3 million Division 296 threshold, moving from a reversionary pension to a non-reversionary pension supported by an appropriate binding death benefit nomination could provide valuable flexibility.

In the right circumstances, the timing difference may defer a Division 296 liability and potentially preserve other planning opportunities.

For other clients, the strategy could create unnecessary complexity, reduce estate planning certainty or produce tax costs elsewhere that exceed the potential Division 296 saving.

The decision becomes particularly important where both spouses have significant superannuation balances and the survivor could suddenly move from below or around the Division 296 threshold to substantially above it following their spouse’s death.

The Importance of Reviewing Existing Arrangements

Clients with large super balances should consider reviewing their pension and estate planning arrangements before they become urgent.

This review should consider not only who receives the superannuation benefit but how and when it will be received.

For couples approaching or exceeding the Division 296 threshold, modelling both reversionary and non-reversionary scenarios can help identify whether there is a meaningful financial difference.

Importantly, Division 296 should not be considered in isolation. Superannuation tax, pension exemptions, transfer balance cap rules, contribution eligibility, estate planning certainty and the surviving spouse’s future cash-flow requirements all need to be considered.

Contact Cadre Capital Partners

If your superannuation balance is approaching or exceeds $3 million, or you would like to review how your existing reversionary pension and death benefit nominations interact with Division 296, please contact Cadre Capital Partners.

We can work with your accountant and estate planning advisers to review your existing arrangements, model the potential outcomes and determine whether any changes should be considered as part of your broader retirement and estate planning strategy.

Important Information

This article contains general information only and does not take into account your personal objectives, financial situation or needs. Superannuation, death benefit, transfer balance cap and Division 296 rules are complex and subject to change. Before acting on any information, you should consider its appropriateness to your circumstances and obtain relevant financial, taxation and legal advice.