Last updated on 10 October 2026
Why do people buy property in an SMSF?
Property has always been an attractive option for a self-managed super fund (SMSF). It is often considered a strong component of building wealth for SMSF members, providing diversification in the fund’s investment portfolio and tax efficiency, with a maximum tax rate of 15% on net rental income and capital gains, and possibly nil where the fund is in 100% pension mode. Of course, the new Division 296 laws mean members also have to consider additional personal tax of 15% on the portion of income exceeding their total super balance (TSB) of $3 million and 10% on the portion of income exceeding their TSB of $10 million.
Capital gains and negative gearing changes in the federal budget
Capital gains tax and negative gearing reforms were included in the Federal Budget. The budget did not change how capital gains are taxed in an SMSF. However, it changes how capital gains are taxed for individuals, partnerships, and other trusts. Negative gearing deductions for established residential buildings will be restricted to offset against future rental income and capital gains for the specific property. Grandfathering applies to established residential property owned at budget night, allowing investors to continue to negatively gear it without restrictions. The negative gearing measures apply to individuals, companies, partnerships, and most trusts, but exclude SMSFs and widely held trusts. Non-residential, or commercial, buildings can continue to be negatively geared without restrictions.
Capital gains tax on property held by an SMSF vs an individual
The recent Federal Budget changes give SMSFs a tax advantage when growth is moderate to high and exceeds inflation, even after accounting for the effect of Div 296 tax. When inflation and growth are similar, there may be little difference between the capital gains tax in your SMSF and that in your personal tax return, but the difference increases significantly as inflation exceeds growth. Under these circumstances, it may be optimal to hold the property in your own name, but only after considering the effect of the exempt current pension income (ECPI)on the capital gains tax calculation.
An SMSF applies a 1/3 discount to a capital gain when a property is held for more than 12 months, with the gain taxed at a maximum rate of 15%, resulting in an effective tax rate of 10%. A fund in 100% pension mode does not pay any capital gains tax.
Individuals pay capital gains tax at their marginal tax rate, with a 50% discount applied to the gain if the property was held for more than 12 months. From 1 July 2027, individuals will have capital gains assessed differently: the 50% discount will no longer be available and has been replaced by an indexed cost base approach. When comparing the effect of capital gains tax between an SMSF and an individual, we have assumed the individual is on the top marginal tax rate of 47%.
Example 1: Growth rate is moderately high with lower inflation
| Individual | SMSF -TSB < $3m | SMSF – TSB $4m | SMSF -TSB $12m | |
| Taxable gain | $348,810 | $419,263 | $419,263 | $419,263 |
| Proportion of earnings >$3m | N/A | N/A | $104,816 | N/A |
| Proportion of earnings >$10m – Part A | N/A | N/A | N/A | $314,447 |
| Proportion of earnings >$10m – Part B | $69,891 | |||
| CGT on taxable gain | $163,941 | $62,889 | $62,889 | $62,889 |
| Div 296 tax – Part A | N/A | N/A | $15,722 | $47,167 |
| Div 296 tax – Part B | N/A | N/A | N/A | $6,988 |
| Total CGT & Div 296 tax | $163,941 | $62,889 | $78,611 | $117,043 |
- Cost of property $1,000,000
- Held for 10 years
- Growth of 5%, resulting in a sale value of $1,628,895
- Inflation was 2.5%, resulting in an indexed cost base of $1,280,085
- Individual’s marginal tax rate 47%
- Taxable gain after 1/3 discount- 2/3* ($1,628,895 -$1,000,000) = $419,263
- Proportion of earnings subject to Div 296 tax
- TSB $4m Part A ($4m-$3m)/$4m = 25% * taxed at 15%
- TSB $12m Part A ($12m-$3m)/$12m = 75% * taxed at 15%
- TSB $12m Part B ($12m-$10m)/$12m= 16.67% * taxed at 10%
Example 2: Growth rate and inflation rate are similar
Same facts as example 1, except the growth rate is 3% with a sale value of $1,343,916
Taxable gain after 1/3 discount – 2/3 * ($1,343,916-$1,000,000) = $229,278
| Total CGT & Div 296 tax | Individual | SMSF -TSB < $3m | SMSF – TSB $4m | SMSF -TSB $12m |
| Taxable gain | $63,832 | $229,278 | $229,278 | $229,278 |
| Proportion of earnings >$3m | N/A | N/A | $57,319 | N/A |
| Proportion of earnings >$10m – Part A | N/A | N/A | N/A | $171,958 |
| Proportion of earnings >$10m – Part B | $38,213 | |||
| CGT on taxable gain | $30,001 | $34,392 | $34,392 | $34,392 |
| Div 296 tax – Part A | N/A | N/A | $8,598 | $25,794 |
| Div 296 tax – Part B | N/A | N/A | N/A | $3,821 |
| Total CGT & Div 296 tax | $30,001 | $34,392 | $42,990 | $64,007 |
Example 3: Effect of ECPI using figures from example 1
| Individual | SMSF -TSB <$3mil | SMSF -TSB $4mil | SMSF-TSB $12mil | SMSF TSB $4m &100% pension | SMSF TSB $12m & 100% pension | |
| Taxable capital gain (TCG) | $348,810 | $419,263 | $419,263 | $419,263 | Nil | Nil |
| Less ECPI 30% | N/A | ($125,779) | ($125,779) | ($125,779) | N/A | N/A |
| TCG | $348,810 | $293,485 | $293,485 | $293,485 | Nil | Nil |
| CGT | $163,941 | $44,023 | $44,023 | $44,023 | Nil | Nil |
| Div 296 -Part A | N/A | N/A | $15,722 | $47,167 | $15,722 | $47,167 |
| Div 296 – Part B | N/A | N/A | N/A | $6,988 | N/A | $6,988 |
| Total CGT & Div 296 Tax | $163,941 | $44,023 | $59,745 | $98,178 | $15,722 | $54,155 |
How does Division 296 affect the calculation of capital gains?
The examples above reflect the combined effects of the new capital gains tax rules and Div 296 tax. However, Div 296 tax is a personal tax, not an SMSF tax. It can be paid from the member’s fund balance, but it is not an SMSF tax liability. Div 296 tax applies to earnings, including capital gains. An SMSF can opt in and elect to reset the cost base of assets to market value to avoid Div 296 tax applying to unrealised gains in assets held by the SMSF at 30 June 2026. The uplift in the cost base applies only for Div 296 purposes and does not affect the calculation of capital gains included in the fund’s tax assessment.
Negative gearing in an SMSF
An SMSF purchasing a residential property has become more attractive following the federal budget delivered on 12 May 2026.
An SMSF is one of the few entities that can continue to negatively gear a property or other asset without restrictions. This is significant for SMSFs holding, or seeking to acquire, property financed under a limited recourse borrowing arrangement (LRBA), as the interest often means expenses exceed rental income, which can be offset against other SMSF income. However, since the government’s latest changes in June 2026, LRBAs can only be used for business real property, not residential property from 10 August 2026 onwards.
Key consideration when purchasing a property in an SMSF
Do not go to an auction and expect to purchase a property in an SMSF if you don’t already have one. An SMSF must be established before you can legally acquire a property. There are many compliance issues to consider, and it is not wise to rush into an investment decision that could commit a significant portion of the fund’s assets.
We can help you with compliance issues and set up an SMSF and a bare trust if you intend to finance a commercial property acquisition using an LRBA.