Avoid These SMSF CGT Mistakes When Selling Property

A complying SMSF pays 15 per cent tax on assessable income, including capital gains, unless the property supports a retirement phase pension.

That single sentence changes how you think about selling property inside your super. The difference between paying 10 per cent, zero, or the full 15 per cent on a gain depends on how long you held the asset, whether it supports a pension, and how your fund calculates its exempt income. Most trustees focus on whether they can borrow to buy the property. Far fewer understand how the gain is taxed when they sell, or how the transition from accumulation to pension phase affects the liability.

CGT in Accumulation Phase: The Discount That Applies

When your SMSF holds property in accumulation phase, a capital gain is included in the fund's assessable income at 15 per cent, reduced by a one-third discount if the asset was held for at least 12 months. The effective rate on the discounted gain becomes 10 per cent. A capital loss can only offset capital gains, not other income, and excess losses carry forward to future years.

Consider a fund that purchased a commercial property in Unley using an SMSF loan under a Limited Recourse Borrowing Arrangement. The property was held for three years in accumulation phase, then sold. The capital gain after deducting the cost base and selling costs was $200,000. The fund applies the one-third discount, reducing the taxable gain to approximately $133,333. At 15 per cent, the tax liability is around $20,000. If the property had been held for less than 12 months, the full $200,000 gain would be taxed at 15 per cent, resulting in $30,000 in tax.

The discount is not a separate CGT rate. It reduces the net capital gain before the fund's 15 per cent rate applies. The liability also depends on the fund's overall tax position for that year, including any carried-forward capital losses.

Pension Phase: When SMSF Property Gains Become Tax-Free

A capital gain is not automatically exempt because your fund has started a pension. The exemption depends on whether the property was a segregated current pension asset at the time of sale, or the proportion of the fund's income attributed to pension phase under the proportionate method.

Under the segregated method, income from assets that exclusively support retirement phase income streams is exempt, and capital gains on those assets are disregarded entirely. A capital loss on a segregated asset cannot offset other gains. From the 2022 financial year, where all fund assets support retirement phase benefits for the entire year, the segregated method must be used and an actuarial certificate is not required.

Under the proportionate method, an actuary determines the proportion of the fund's total assessable income that is exempt, and that proportion is applied to the net capital gain. This method is used when the fund has both accumulation and pension interests, or when assets cannot be segregated because their market value exceeds the account balances of the income streams they support.

In our experience, funds with a mix of accumulation and pension members often assume the entire gain is taxable. A fund holding a commercial property in Norwood sold the asset after two members had transitioned to pension phase, while one remained in accumulation. The actuary determined that 65 per cent of the fund's income was exempt. The capital gain after discount was $150,000. The exempt portion was $97,500, leaving $52,500 taxable at 15 per cent, resulting in approximately $7,875 in tax instead of $22,500 if no exemption applied.

Division 296 Tax and SMSF Property Gains from 1 July 2026

Division 296 tax applies from 1 July 2026 to individuals whose total super balance exceeds $3 million, with an additional tier at $10 million. The tax is assessed to the member, not the fund, and is calculated on the proportion of total super earnings that relates to the amount above the threshold. Earnings include both realised and unrealised gains attributed to the member.

For an SMSF, Division 296 fund earnings are an adjusted amount of the fund's taxable income, and a portion is attributed to each member whose total super balance exceeds the threshold. An unrealised increase in property value does not produce assessable income for the fund, but it is included in the member's total super earnings for Division 296 purposes. Tax applies only where total super earnings are greater than nil.

An SMSF can elect to adjust the cost base of its CGT assets to market value at 30 June 2026 for the purpose of calculating Division 296 fund earnings. The election applies to all CGT assets held at that date, including property held directly or through a bare trust under a Limited Recourse Borrowing Arrangement. Once made, the election cannot be revoked, and it must be made by the due date of the SMSF annual return for 2026-27. The election resets the first element of the cost base to the 30 June 2026 market value, which can reduce the taxable gain when the property is eventually sold.

A fund that did not make the election and sells a commercial property years later will calculate Division 296 fund earnings using the original cost base, potentially attributing a larger gain to members above the threshold.

How LRBA Amounts Affect Total Super Balance

From 30 June 2026, a member's share of an outstanding LRBA balance is included in their total super balance if the LRBA was entered into on or after 1 July 2018 and either the lender is a related party or the member has met a condition of release with no cashing restriction. This inclusion applies for purposes other than Division 296 tax, such as determining contribution cap eligibility and transfer balance cap calculations. LRBA amounts are never included in total super balance for Division 296 purposes.

The inclusion affects whether a member can make non-concessional contributions or access bring-forward arrangements. A member whose total super balance on 30 June was $1.97 million or above has a non-concessional cap of $130,000 for the current year. If the balance was $2.1 million or above, the non-concessional cap is nil.

A member approaching retirement with a $1.9 million balance and a $400,000 LRBA financed through a related party loan after 1 July 2018 has a total super balance of $2.3 million once they meet a condition of release. At that point, no further non-concessional contributions are allowed, and the transfer balance cap calculation includes the full account balance, potentially limiting the amount that can be transferred to pension phase.

Selling SMSF Property After the August 2026 LRBA Rule Change

The rule change from 10 August 2026 does not apply to LRBAs entered into before that date, even if the property is sold or refinanced after. An SMSF that financed a residential investment property in Prospect under an LRBA in early 2025 can maintain or refinance that loan on or after 10 August 2026 without the property needing to be business real property.

For LRBAs entered into on or after 10 August 2026, the property must be business real property when the arrangement begins and throughout its life. If a commercial property stops being business real property during the LRBA, the fund fails to maintain the arrangement under the rules and compliance action may apply. Selling the property and repaying the loan ends the LRBA, and the capital gain is taxed according to the fund's phase and the asset's holding period.

A fund considering a commercial loan for business real property after 10 August 2026 should confirm the property meets the wholly and exclusively test at acquisition and plan for how a change in use or vacancy might affect compliance. For property on which commercial premises are leased, the asset does not stop being business real property only because the owner is looking for a new tenant, but it does if the owner abandons plans to lease it.

The transition from holding to selling involves both loan compliance and CGT treatment. A fund that sells a commercial property in Glenelg held under a post-August 2026 LRBA and moves the proceeds into pension phase can eliminate CGT on future asset sales, provided the entire fund is in pension phase and the segregated method applies.

Call one of our team or book an appointment at a time that works for you. We work with SMSF trustees across Adelaide to structure borrowing, manage compliance with the August 2026 rule change, and plan for the CGT treatment on property sales in both accumulation and pension phase.

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