SMSF CGT: The Benefits and Costs of Holding Property

Property held inside an SMSF attracts CGT at either 15 percent or 10 percent during accumulation phase, and may be exempt during pension phase depending on how the fund is structured.

The difference between those rates matters when you're selling a property held in super, but the outcome depends on more than just the headline tax rate. Whether you've transitioned to pension phase, how long you've held the asset, and whether your fund uses segregated or unsegregated assets all affect the final position. For Ryde residents holding commercial or residential property through super, understanding the CGT treatment shapes decisions about timing, structure, and whether to hold an asset long-term or turn it over.

Recent legislative changes have also restricted new borrowing for residential property inside SMSFs from August 2026, which shifts attention to commercial property and to managing existing holdings. The CGT treatment hasn't changed, but the borrowing landscape has.

CGT Rates During Accumulation Phase

A complying SMSF pays tax on net capital gains at 15 percent, with a one-third discount available where the asset has been held for at least 12 months, producing a maximum effective rate of 10 percent on the discounted gain.

Consider a fund that acquired a commercial property on Victoria Road in West Ryde several years ago under a limited recourse borrowing arrangement. The property was leased to an unrelated business on arm's length terms. At the time of sale, the fund had held the property for three years. The purchase price was $850,000, with acquisition costs of $32,000. The sale price was $1,050,000, with selling costs of $28,000. The capital gain before discount was $140,000. After applying the one-third CGT discount, the taxable gain was approximately $93,000, and the tax payable was around $14,000.

The discount applies only where the property has been held for more than 12 months. If the same property were sold within 12 months, the entire $140,000 gain would be taxed at 15 percent, resulting in a tax liability of $21,000. Timing a sale to meet the 12-month threshold can reduce the tax by a third.

Capital losses from other assets can be offset against capital gains, but only against gains, not against rental income or other assessable income. A fund holding multiple properties may choose to realise a loss in the same financial year as a gain to reduce the overall taxable amount. Capital works deductions and depreciation already claimed reduce the cost base and increase the capital gain, so a property with significant depreciation claimed over several years will produce a larger taxable gain than the raw difference between purchase and sale price suggests.

CGT Treatment in Pension Phase

A capital gain on an asset supporting a retirement-phase income stream may be partly or fully exempt under the exempt current pension income (ECPI) rules, depending on whether the fund's assets are segregated.

Where a fund's assets are fully segregated as current pension assets, a capital gain on disposal of those assets is disregarded entirely. A fund in full pension phase with no accumulation members selling a property held in the pension account pays no CGT on the gain.

Where the fund uses the proportionate method because it has both accumulation and pension interests, the exemption applies only to the exempt proportion of the net capital gain, as determined by an actuarial certificate. A fund with 60 percent of its assets supporting pensions and 40 percent in accumulation phase would pay CGT on 40 percent of the discounted capital gain. The actuarial calculation is based on the fund's total assets and liabilities, not on the specific property being sold.

The outcome also depends on whether minimum pension payment requirements have been satisfied, whether the fund's total superannuation balances exceed the transfer balance cap, and whether the property was transferred from accumulation to pension phase before sale. A property transferred into pension phase shortly before sale does not automatically qualify for full exemption. The ECPI rules apply to the fund's overall position across the financial year, not to individual assets in isolation.

Division 296 Tax and Realised Gains from 1 July 2026

Division 296 tax applies an additional 15 percent tax to earnings above $3 million in total superannuation balance, and an additional 10 percent above $10 million, but only to realised gains, not to unrealised increases in property value.

An SMSF holding a residential property in Ryde with a current market value well above its purchase price does not pay Division 296 tax on that increase until a CGT event occurs. Rental income and realised capital gains contribute to the Division 296 earnings calculation, but an unrealised increase in property value does not by itself produce assessable income or Division 296 fund earnings. Limited recourse borrowing arrangement amounts are disregarded when calculating a member's total superannuation balance for Division 296 purposes.

An SMSF may elect to adjust the cost base of its CGT assets to market value as at 30 June 2026. This election recognises accrued value prior to the commencement of Division 296 and applies to all CGT assets held directly by the SMSF at that date. The election applies only for the purpose of working out Division 296 fund earnings. A fund that made this election and sells a property acquired years ago would calculate the Division 296 gain from the 30 June 2026 value, not the original purchase price, but the standard CGT liability under accumulation or pension rules is calculated from the original cost base.

Division 296 tax is a separate calculation from the fund's ordinary income tax and ECPI exemptions. A member whose total superannuation balance exceeds the threshold may face Division 296 tax even where the fund itself pays no CGT due to pension phase exemptions.

The 2026 Restriction on New Residential Borrowing

New limited recourse borrowing arrangements for residential property have been restricted from August 2026, but existing arrangements and refinancing of those arrangements are protected under transitional provisions.

The restriction applies to new borrowing arrangements entered into from approximately 10 August 2026. It does not prohibit SMSFs from owning or acquiring residential property. A fund may continue to hold existing residential property, acquire residential property without borrowing, or refinance an existing residential LRBA on terms consistent with the original arrangement. The restriction applies to new borrowing arrangements involving residential property that does not meet the business real property definition under the SIS Act.

Commercial property that satisfies the business real property definition remains eligible for LRBA borrowing. Business real property means land and buildings used wholly and exclusively in one or more businesses. A property on Blaxland Road in Ryde leased to a medical practice or professional services firm would typically qualify, provided the lease is on arm's length terms and the property is used wholly and exclusively for business purposes. A mixed-use property with a residential component may not qualify, or may only partially qualify, depending on the specific use.

Whether an existing residential LRBA qualifies for transitional protection depends on whether the arrangement was legally entered into before the commencement date. This is determined by the surrounding circumstances and documentation, not solely by the exchange of a contract. Trustees holding existing residential LRBAs or in the process of acquiring residential property should obtain specialist legal advice before assuming a transaction qualifies for protection.

Holding Versus Selling in Pension Phase

The decision to hold or sell a property during pension phase depends on the fund's overall structure, the member's total superannuation balance, and whether the gain would be fully or partially exempt.

A fund in full pension phase with segregated assets and a total superannuation balance below the Division 296 thresholds can sell a property and pay no CGT and no Division 296 tax on the gain. The exemption applies regardless of how long the property was held or how large the gain. A fund in this position has no tax reason to delay a sale, and the decision turns on whether the property continues to meet the investment strategy and whether the proceeds can be redeployed more effectively.

A fund using the proportionate method with both accumulation and pension interests will pay CGT on the accumulation proportion of the gain. In our experience, funds in this position sometimes delay a sale until the accumulation balance is drawn down or converted to pension phase, particularly where the gain is large and the accumulation proportion is significant. Where a member's total superannuation balance exceeds the Division 296 thresholds, the additional tax on the realised gain may outweigh the benefit of the ECPI exemption, and the timing decision becomes more complex.

The interaction between ECPI, Division 296 tax, and the fund's borrowing capacity for future acquisitions requires modelling specific to the fund's circumstances. A property sold in pension phase may produce no CGT liability but still contribute to Division 296 earnings where the member's balance exceeds $3 million.

Call one of our team or book an appointment at a time that works for you to discuss how CGT and Division 296 tax apply to your specific SMSF structure and whether holding or selling aligns with your retirement planning.

Frequently Asked Questions