The Senate sits next week and according to a preliminary schedule, the legislation is expected to be debated in the first week of the last session of Parliament for this year.

Firth’s example of how the tax will impact an SMSF involves a fund that held a stake in a mining company. She explained that if the Div 296 tax was already in play, this investment choice would have cost the client not only his superannuation but also his house due to the unfortunate timing of a large unrealised gain followed by a massive unrealised loss.

Firth explained that the member’s balance had grown and was sitting comfortably above $3 million on 1 July 2022 due to the mining investment’s performance.

“Under the Div 296 rules, if they had applied at this point, the member would have been subject to the additional tax, given their balance exceeded the legislated threshold,” she said.

By 30 June 2023, the mining stock value spiked and the SMSF’s unrealised gains were more than $7.7 million. However, by 2024 the stock’s value had plummeted, leading to an unrealised loss of $10 million in the fund.

“The timing was what truly turned this into a nightmare scenario. By the time the fund's financials for 2023 were finalised, and the Div 296 tax notice issued, the stock value would have returned closer to its original levels,” she said.

“Despite this, the Div 296 tax would still be due — effectively representing 40 per cent of the remaining balance of the SMSF.”

To pay this tax, Firth said, the fund would have been forced to liquidate most of its assets, with the mining shares at the core of the issue potentially unsellable due to their sharply declining value.

She added that the other assets in the fund would not have covered the Div 296 liability.

“Here’s where it gets particularly concerning: Div 296 tax is a personal liability for the trustee. In this case, the member, already retired, doesn’t have an extra $1.1 million in personal assets to cover the tax.”

“This leaves them with a single option — selling their family home to cover the balance of the tax.”

Firth said if the proposed Div 296 tax was in place in 2023, the member would now face an unsettling outcome: zero super, no family home, and a worthless carry-forward loss of $10 million in an SMSF with an empty balance.

“They would be left with no choice but to rely on the government for pension and rental support, all due to the timing of an unrealistic stock price spike.”

“This case illustrates just how unfair the proposed Div 296 legislation can be and why taxing unrealised gains is not appropriate. It highlights the pressing need to remove unrealised gains from Div 296 tax as temporary market swings can leave members and trustees financially stranded by short-lived gains.”