Unlock the secrets to SMSF property CGT treatment

Property held inside an SMSF follows different capital gains tax rules depending on whether the fund is in accumulation or pension phase.

The tax treatment determines how much of a sale proceeds you retain, and the difference between the two phases can be measured in tens of thousands of dollars on a single transaction. Understanding the structure before you acquire the property allows you to build an exit strategy that reflects the actual after-tax outcome.

CGT rates in accumulation phase

An SMSF in accumulation phase pays capital gains tax at 15 percent on net gains, reduced to 10 percent where the asset has been held for at least 12 months. The one-third discount applies to the gain itself, not the tax rate, meaning the effective rate is two-thirds of 15 percent. Only the net capital gain is assessable after applying available capital losses and the discount.

Consider a scenario where a fund acquired a commercial property under a Limited Recourse Borrowing Arrangement and holds it for six years in accumulation phase. The property was purchased for $800,000 and sold for $1,100,000. After deducting allowable costs including legal fees and agent commission of $40,000, the gross capital gain is $260,000. The fund applies the one-third discount, leaving a net capital gain of $173,333. Tax at 15 percent is $26,000. Had the property been sold before the 12-month holding period, tax would have been $39,000 on the full gain. The discount saved $13,000.

CGT exemption in pension phase

Where the asset is held entirely to support a member in pension phase and the fund satisfies the relevant conditions, capital gains on disposal are exempt from tax. No discount is required because the entire gain is disregarded. The exemption applies to assets that were supporting income streams in accordance with regulation 995-1.03 of the Income Tax Assessment Act 1997.

The exemption does not apply retrospectively to periods when the fund was in accumulation phase. If the property was held for four years in accumulation and two years in pension phase, a proportionate method applies. The fund calculates the days the asset supported a retirement phase pension as a percentage of the total ownership period. That percentage of the capital gain is exempt. The remainder is taxed at the accumulation rate with the CGT discount applied where the total holding period exceeds 12 months.

Transitioning property between phases

When a member commences a pension, the fund does not dispose of and reacquire its assets. The same property continues to be held, but its character changes. The portion of the gain that accrued while the asset supported the pension is exempt. The portion attributable to accumulation phase remains taxable.

In a scenario where a fund purchased an SMSF residential loan property in accumulation phase and the member commenced a pension three years later, the sale five years after the pension commenced would see 62.5 percent of the gain exempt and 37.5 percent taxable at the discounted accumulation rate. The calculation depends on the number of days in each phase, not the change in value during those periods. If the property appreciated more during one phase than the other, that difference is not reflected in the apportionment unless the fund obtains a market valuation at the transition date and elects to use the market value method under section 295-390 of the Income Tax Assessment Act 1997.

Market value election at transition

Section 295-390 allows a fund to elect to use the market value of an asset at the time it begins to be used to support a pension. The election effectively resets the cost base to the market value at that date. Future gains are measured from the reset value, meaning any gain that accrued during accumulation phase is crystallised and taxed when the fund later disposes of the asset, but gains accruing after the transition are entirely exempt if the asset continues to support the pension until disposal.

The election must be made by the time the fund lodges its tax return for the year in which the asset is first used to support a pension. Once made, the election is irrevocable. It applies on an asset-by-asset basis, allowing the trustee to elect for some assets and not others. The decision depends on whether the trustee expects further growth and whether locking in the accumulation phase gain at the transition date produces a lower tax outcome than apportioning the total gain at the time of sale.

Rental income tax during ownership

While the property is held, rental income is taxed at 15 percent in accumulation phase and exempt in pension phase. The distinction affects cash flow during ownership, not just the sale outcome. A property generating $50,000 in annual rent pays $7,500 tax in accumulation phase and nil in pension phase. Over a 10-year hold, that difference is $75,000 before compounding.

SMSF rental income tax treatment and the CGT outcome are connected. Funds that transition a property to pension phase partway through ownership receive a tax benefit on both rental income and capital gain from the transition date forward, provided the asset continues to support the pension and the member's total superannuation balance remains within the transfer balance cap.

Timing and transfer balance cap interaction

The transfer balance cap limits the amount a member can transfer into pension phase. From 1 July 2026, members commencing a pension for the first time have a personal cap of $2.1 million. Property held within the fund forms part of the assets supporting the pension, but it is the amount transferred to commence the pension that counts against the cap, not the subsequent growth in value of the underlying assets.

A member with $1.8 million in accumulation phase can commence a pension with that full amount. If the fund holds a property valued at $900,000 as part of that pool, and the property later increases in value to $1.3 million, the growth does not breach the cap. The exemption on the capital gain remains available when the property is sold, provided the pension continues and no other disqualifying event occurs.

Where a member's total superannuation balance exceeds $3 million, Division 296 tax applies to the proportion of earnings above that threshold. Division 296 tax is separate from the CGT exemption. A fund in pension phase remains exempt from CGT on disposal of an asset supporting the pension, but earnings including unrealised gains may be subject to Division 296 tax depending on the member's total superannuation balance at the end of the financial year.

Segregated versus unsegregated funds

A fund is segregated in a financial year if all its assets are used solely to support one or more retirement phase pensions for the entire year. A segregated fund treats all investment income and capital gains as exempt from tax. An unsegregated fund holds assets supporting both accumulation and pension interests. It must apportion income and gains using either the proportionate method or the segment reporting method set out in the Income Tax Assessment Act 1997.

Most SMSFs with both accumulation and pension members are unsegregated. The fund calculates the exempt proportion by dividing the pension liabilities by total fund liabilities as at the end of each quarter, then averaging across the year. That percentage of investment income and capital gains is exempt. The remainder is taxed at accumulation rates.

Where an SMSF holds a single high-value property and the member wishes to maximise the pension phase exemption, the trustee may consider segregating that asset by ensuring it is used only to support the pension and maintaining separate accumulation assets elsewhere in the fund. Segregation requires clear documentation and consistent treatment across all tax returns and actuarial certificates.

Interaction with SMSF borrowing capacity and LVR

Capital gains tax does not apply during the life of the loan, but the tax treatment on exit affects the net proceeds available for reinvestment or distribution. A fund planning to sell a property and use the proceeds to acquire another asset should model the after-tax sale proceeds before committing to a purchase price on the replacement property.

Where a fund used an SMSF commercial loan or SMSF property loan to acquire the original asset, the loan must be repaid from sale proceeds or existing cash reserves before legal title transfers to the fund. The capital gain is calculated without deduction for interest paid during ownership, but interest is deductible against rental income in the years it was paid. The two tax treatments operate independently.

Legislative changes and grandfathering

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 prohibits new limited recourse borrowing arrangements for residential property from approximately 10 August 2026. Existing arrangements entered into before that date are grandfathered. The CGT treatment of residential property acquired under a grandfathered arrangement remains unchanged. The prohibition affects acquisition, not disposal or tax on disposal.

Funds holding residential property under a pre-commencement LRBA should document the contract exchange date and retain evidence that the arrangement was entered into before the operative date. The same CGT rules apply regardless of whether the property was acquired under an LRBA or with existing fund assets.

Call one of our team or book an appointment at a time that works for you. We work with SMSF lenders across both commercial and grandfathered residential property and can refer you to SMSF specialists for tax and compliance advice specific to your fund's circumstances.

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