When to Consider CGT in SMSF Property Loans

Self-managed super funds using borrowed money to acquire residential property face significant changes from 10 August 2026. While existing arrangements remain protected, the capital gains tax treatment of property held through an SMSF continues to depend on whether the fund is in accumulation or pension phase at the time of sale.

What Changed for SMSF Property Borrowing in August 2026

From 10 August 2026, limited recourse borrowing arrangements can only be used to acquire business real property. SMSFs can no longer borrow to purchase residential property, including houses, apartments, and townhouses in suburbs like Brighton, where the bayside location and established rental market previously made residential LRBAs a common structure. The change applies to new arrangements entered into on or after that date. Existing LRBAs established before 10 August 2026 are not affected, and SMSFs may continue to hold and manage those properties under the original terms. Where a binding contract to acquire real property was exchanged before 10 August 2026, the arrangement is protected even if settlement or loan execution occurred after that date.

This does not prevent an SMSF from owning residential property. Funds can still acquire residential assets without borrowing, provided the purchase complies with the Superannuation Industry (Supervision) Act 1993, including the prohibition on acquiring property from a related party and the requirement that no member or related party may occupy the property.

How Capital Gains Tax Applies During Accumulation Phase

A complying SMSF is taxed at 15 percent on assessable income, including net capital gains. Where a residential property acquired through an LRBA has been held for at least 12 months, a one-third discount applies to the capital gain. This produces a maximum effective rate of 10 percent on the discounted gain, though the actual tax liability depends on the property's adjusted cost base, selling costs, capital improvements, capital works deductions, and the fund's overall tax position for that year. Capital losses can only be offset against capital gains and cannot reduce other income. If capital losses exceed gains in a financial year, the net loss is carried forward to offset future capital gains.

Consider a Brighton SMSF that purchased an investment apartment under an LRBA in the accumulation phase and sells after holding the property for three years. The fund calculates the capital gain by subtracting the original purchase price, acquisition costs, and any allowable capital works deductions from the sale proceeds. After applying the one-third discount for holding the asset beyond 12 months, the discounted gain is included in the fund's assessable income and taxed at 15 percent. If the fund has carried forward capital losses from a previous property sale, those losses reduce the assessable gain before tax is applied.

Capital Gains Tax When the Fund is in Pension Phase

A capital gain is not automatically exempt because an SMSF has commenced a pension. The fund receives a tax exemption on investment income from assets supporting a retirement-phase income stream, known as exempt current pension income (ECPI). Where the fund's assets are fully segregated as current pension assets at all times during the income year, a capital gain on disposal is disregarded. From the 2022 financial year, where all of a fund's assets are paying retirement phase pension benefits throughout the year, the assets are regarded as segregated current pension assets. Where the fund uses the proportionate method, the exemption applies only to the exempt proportion of the net capital gain, as determined by an actuarial certificate.

In a scenario where a Brighton SMSF holds a residential property acquired under an LRBA before August 2026 and the member transitions fully to pension phase two years before selling, the fund may qualify for full ECPI exemption on the capital gain if all assets remain in pension phase throughout the income year of sale and minimum pension payment requirements are satisfied. If the fund holds both accumulation and pension interests at the time of sale, only the portion of the gain attributable to pension phase assets is exempt. The outcome depends on the ECPI method used, whether an actuarial certificate is required, and the fund's specific circumstances.

Division 296 Tax and Realised Property Gains

From 1 July 2026, members with a total superannuation balance exceeding $3 million at the end of the financial year are subject to an additional 15 percent Division 296 tax on the proportion of earnings attributable to the amount above that threshold. Where the balance exceeds $10 million, an additional 10 percent applies to the proportion above that threshold. Both thresholds are indexed in increments of $150,000 for the lower threshold and $500,000 for the higher threshold in subsequent years.

For SMSF purposes, Division 296 fund earnings are an adjusted amount of the fund's taxable income. A capital gain must be realised through a CGT event to form part of the fund's assessable income and therefore the Division 296 earnings base. An unrealised increase in property value does not constitute a CGT event and does not by itself produce assessable income or Division 296 fund earnings. Rental income and realised capital gains contribute to the Division 296 calculation. Amounts relating to the LRBA are disregarded when calculating a member's total superannuation balance for Division 296 tax purposes.

An SMSF may elect to adjust the cost base of its CGT assets to market value as at 30 June 2026 for Division 296 fund earnings purposes. This election recognises accrued value prior to the commencement of Division 296 tax. The election applies to all CGT assets held directly by the SMSF at 30 June 2026, cannot be revoked, and must be made by the due date of the 2026-27 SMSF annual return. Members do not need to be over the threshold for the fund to make this election. Division 296 tax assessments for the 2026-27 income year are expected to begin issuing in the second half of the 2027-28 income year.

Refinancing Existing SMSF Property Arrangements

Where an SMSF holds residential property under an LRBA established before 10 August 2026, the fund may refinance that arrangement without triggering the restriction on new residential LRBAs. The transitional provisions protect existing arrangements and their refinancing. This allows trustees to seek more favourable loan terms, adjust the loan structure, or move to a different lender while maintaining the residential property within the fund. The capital gains tax treatment of the property remains tied to whether the fund is in accumulation or pension phase at the time of sale, not to the refinancing event itself.

Brighton-based SMSF trustees holding bayside residential property through an LRBA should review their loan terms periodically, particularly where loan structures were established several years ago and current lending conditions may offer lower rates or improved flexibility. Working with a specialist SMSF lender ensures the refinancing maintains compliance with the transitional provisions and does not inadvertently create a new arrangement subject to the August 2026 restrictions.

Planning Around the Sole Purpose Test and Sale Timing

The sole purpose test under section 62 of the SIS Act requires trustees to ensure the fund is maintained solely to provide retirement benefits to members. All SMSF investments, including property held under an LRBA, must satisfy this test at all times. Where a member transitions to pension phase, the timing of that transition relative to the sale of a property can materially affect the capital gains tax outcome. A property sold during accumulation phase attracts tax at up to 10 percent on the discounted gain, while a property sold after the fund has fully transitioned to pension phase may be entirely exempt from CGT if the fund meets the segregated current pension asset requirements.

Decisions about when to sell, when to commence a pension, and how to structure the fund's asset mix require coordination between the SMSF trustee, the fund's accountant, and the mortgage broker managing any refinancing or loan repayment strategy. The capital gains tax treatment is one factor among several, including the member's age, total superannuation balance, and the fund's liquidity needs to meet minimum pension payment requirements.

For Brighton property owners using an SMSF structure, the interplay between CGT, Division 296 tax, and pension phase timing is particularly relevant given the area's median values and the likelihood that members holding bayside property may approach or exceed the $3 million total superannuation balance threshold. The tax treatment is not static and depends on decisions made in the years leading up to sale.

Call one of our team or book an appointment at a time that works for you to discuss how capital gains tax applies to your SMSF property and whether refinancing or restructuring your existing arrangement may improve your position before sale.

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