Introduction
If you have a Self-Managed Superannuation Fund (SMSF), when your superannuation fund sells assets, such as shares, property or managed investments, it may realise a capital gain.
Understanding how Capital Gains Tax (CGT) applies to your superannuation assets is essential to preserving the tax advantages of your SMSF.
With the introduction of the 2026-27 Federal Budget and proposed cuts to CGT discounts available to taxpayers investing outside the superannuation system, now, more than ever, SMSFs remain the most tax effective structure for long term investments, as concessional tax rates and access to the CGT discount remains unchanged for SMSFs under the proposed budget measures.
What is Capital Gains Tax?
Broadly, the CGT regime includes a taxpayer's net capital gains arising in respect of a CGT event occurring in a given income year, in their assessable income.
Generally:
You make a capital gain if you receive (or are entitled to receive) capital amounts from a CGT event which exceed your total costs associated with that event; and
You make a capital loss if your total costs associated with a CGT event exceed the capital amounts you receive (or are entitled to receive) from the event.
For example, if your SMSF owns business premises that are sold, the proceeds received from the sale of the business premises will be 'capital proceeds'. A capital gain may arise when the 'capital proceeds' from the sale exceeds the original 'cost base' incurred in acquiring and holding the relevant CGT asset (i.e. the business premises).
If a capital gain has been made, there may then be CGT discounts, rollovers or carry forward losses that can be applied to the gain to reduce the overall net capital gain for a given income year.
You work out your net capital gain for a given income year by:
- Reducing your capital gains for the income year by your capital losses for the income year;
- Reducing any remaining capital gain by any unapplied net capital losses for previous income years (i.e. carry forward losses);
- Reducing any remaining discount capital gains by the CGT discount percentage (if applicable);
- Applying available CGT concessions (e.g. the small business concessions) in further reduction of your capital gains;
Adding up:
- any remaining capital gains that are not discount capital gains; and
- any remaining discount capital gains; and
- The total is your net capital gain for a given income year.
CGT applies to a wide range of assets, including shares, investment properties, managed funds, and certain personal use assets.
Understanding these general principles provides a foundation for examining how CGT applies in more specific contexts, including within a SMSF.
CGT on Superannuation Assets
SMSFs commonly invest in assets that give rise to capital gains, including listed securities (i.e. shares), real property and managed investment funds.
The taxation of these gains depends on:
- the phase of the fund (accumulation or pension);
- the holding period of the CGT asset;
- whether the SMSF complies with arm’s length requirements.
Capital Gains Tax in the Accumulation Phase
In the accumulation phase, a SMSF is subject to tax on its earnings, including any net capital gains derived in a particular income year.
During the accumulation phase, capital gains are taxed at a concessional rate of 15%, consistent with the standard tax rate applicable to complying SMSFs. Again, for a standard disposal or sale of a CGT asset in a SMSF, the gain is calculated as the difference between the capital proceeds received and the cost base of the CGT asset.
Capital losses realised by the SMSF may be used to offset capital gains in the current income year or carried forward to offset future gains. However, such losses are quarantined and cannot be applied against other forms of assessable income (i.e. ordinary income, such as interest or dividend income).
You SMSF may also be eligible for a CGT discount where certain conditions are satisfied, most notably the length of time the relevant CGT asset has been held prior to disposal.
Where a complying superannuation fund holds a CGT asset for at least 12 months, it may apply a one-third (33.33%) discount to any capital gain realised. This reduces the taxable portion of the gain and results in an effective tax rate of 10% in the accumulation phase, rather than the standard 15% rate.
The discount is applied after any available capital losses have been used to offset capital gains. As such, it operates to reduce only the net capital gain included in the fund’s assessable income.
Capital Gains Tax in the Pension Phase
The taxation of capital gains differs significantly where your SMSF is in the pension phase.
In the pension phase, earnings derived from assets that support the payment of a retirement income stream are generally exempt from tax under the 'exempt current pension income' (ECPI) provisions.
There are two methods to working out the ECPI of your SMSF:
- The segregated assets method; and
- The proportional method.
Under the segregated assets method your superannuation assets (such as CGT assets or proceeds) used specifically to support retirement-phase pension payments are separated from the other assets in your SMSF and this income is exempt from income tax.
Under the proportional method, all assets in your SMSF are pooled together and a percentage of the total income in your SMSF is exempt from income tax based on the ratio of retirement-phase pension liabilities and the total liabilities of the fund.
Under either method ECPI can capture capital gains realised on the disposal of assets backing the retirement-phase pension liabilities of your SMSF. As a result, where the relevant conditions are satisfied (e.g. having satisfied the conditions of release, such as reaching your superannuation preservation age) a superannuation fund may not be liable to pay any tax on capital gains generated from such assets.
The availability of this exemption depends on whether the asset is supporting a retirement phase income stream and is subject to limitations such as the transfer balance cap, which restricts the amount of superannuation that can be transferred into the tax free retirement phase.
The transfer balance cap limits the total amount of capital that an individual can transfer into the retirement phase of superannuation (which is then ECPI). From 1 July 2026, the general transfer balance cap is $2.1 million.
If an individual exceeds the transfer balance cap, the individual will be liable to pay excess transfer balance tax on the excess transfer balance earnings that should not have been received ECPI. First breaches by an individual of their transfer balance cap are taxed at the rate of 15% and then 30% for second and subsequent breaches.
Interaction with Non-Arm’s Length Income
The concessional tax treatment of capital gains within your SMSF is subject to an important limitation in the form of the non-arm's length income (NALI) provisions.
Broadly, NALI arises where a SMSF derives income under arrangements that are not conducted on arm’s length terms. This may occur where the parties to a transaction are not independent of each other and the fund receives a benefit that is more favourable than would be expected in a commercial/arm's length context.
Where the income of a SMSF (such as a capital gain) is characterised as NALI, the usual concessional tax treatment does not apply. Instead, the income is taxed at the top marginal rate (currently 45%), rather than the standard 15% rate applicable in the accumulation phase.
The NALI provisions can apply to a range of circumstances involving capital assets. For example, a capital gain may be treated as NALI where:
- an asset is acquired by the fund at less than market value; or
- an asset is disposed of to the fund on non-commercial terms; or
- income is derived from a scheme involving a CGT event and related parties that is not conducted on an arm’s length basis
In such cases, the entirety of the capital gain may be subject to the higher tax rate, regardless of whether only part of the arrangement was non-arm’s length.
Next Steps
If you are unsure about the CGT consequences of certain dealings with your SMSF assets, including accumulation or pension phase treatment, or the application of the NALI provisions, it is important to seek appropriate advice and have a proper understanding of the operation of CGT regime within your SMSF.
