How do capital gains work in an SMSF?

Managing your SMSF means every decision you make has a tax outcome, and capital gains are one of the most important ones to understand. When your fund sells an asset for more than its cost base, the profit becomes a capital gain and is added to your SMSF’s taxable income.

Because the tax rules inside super operate differently from your personal tax, understanding how your capital gains are calculated helps you reduce tax legally and protect your long-term retirement savings. The timing of a sale, the phase your fund is in, and even the way you track costs can all change the final amount you pay.

This blog post walks you through how capital gains work in your SMSF, how to calculate them step by step, and the common traps you need to avoid.

What is a capital gain in a self-managed super fund?

A capital gain in an SMSF occurs when the fund sells an asset for more than the amount it originally paid, including all associated costs. A capital loss is recorded when the sale proceeds fall below the cost base.

These gains form part of a complying fund’s assessable income and are generally taxed at 15% provided the asset is not a long-term asset. If the asset has been held for more than 12 months, the fund is eligible for the one-third capital gains tax discount, effectively reducing the tax rate on the gain from 15% to approximately 10%.

Capital gains can arise from a range of SMSF investments, such as:

• Residential or commercial property
• Listed or unlisted shares
• Managed funds
• Cryptocurrencies
• Collectables or personal use assets

These gains are treated differently from interest, rent, or dividend income, so trustees must understand when a CGT event occurs and how it affects the fund.

For example, SMSF purchased a residential unit in Melbourne for 450,000 dollars. Over the years, the fund incurs legal fees, stamp duty, and improvement costs, bringing the cost base to 470,000 dollars.

When the property is sold for 600,000 dollars, the fund realises a 130,000 dollar capital gain. The trustee must then check how long the property was held, whether any capital losses can offset the gain, and whether part of the fund was in the pension phase during the year.

How to calculate capital gains in an SMSF?

Calculating capital gains inside an SMSF involves several steps:

Step 1: Identify the CGT event: A CGT event occurs when the SMSF disposes of an asset, such as through a sale, transfer, or loss. The timing of the event determines the financial year in which it is reported.

Step 2: Determine the capital proceeds: This is the amount the fund received or became entitled to receive for the asset.

Step 3: Calculate the cost base: The cost base includes:

• Purchase price
• Legal fees, stamp duty, and other acquisition costs
• Improvement costs
• Certain holding costs were eligible

Step 4: Apply capital losses: Capital losses from the current or previous years can be used to reduce capital gains. Losses cannot be applied against other income, such as rent or interest.

Step 5: Apply CGT concessions: Any assets held for 12 months or more are treated as long-term assets, and the capital gain is eligible for the 1/3 CGT discount.

Step 6: Determine the net capital gain: The final figure is reported in the SMSF annual return and included in the fund’s assessable income.

SMSF capital gains calculation example

Let’s say John’s SMSF buys a residential property on 1st June 2018 for $600,000. After holding it for three years, the property was sold on 1st June 2021 for $700,000. Here’s how the capital gains tax (CGT) would be calculated:

• Capital proceeds: $700,000
• Cost base: $600,000
• Capital gain: $700,000 - $600,000 = $100,000

Since the property was held for more than 12 months, John’s SMSF applies the one-third capital gains tax discount:

• Discount: $33,333
• Net capital gain: $66,667

At the standard rate of 15%, the tax payable on the net capital gain is $10,000.

How Non-arm’s length income affects capital gains in an SMSF?

Non-arm’s length income (NALI) applies when an SMSF benefits from a transaction that is not carried out on commercial terms. When this happens, any income or capital gain linked to the arrangement can be taxed at forty-five per cent.

A capital gain may fall under NALI if:

• An asset is purchased below market value
• An asset is sold above market value
• The fund pays little or no expenses linked to the asset
• A related party provides services or financing on non-commercial terms

Since 1 July 2018, NALI also includes non-arm’s length expenditure, even where the purchase and sale occur at market value.

If a gain is classified as NALI:

• The one-third discount does not apply
• The gain is taxed at 45%
• It must be reported at Label U2 or U3 in the SMSF annual return

Example of NALI impact: An SMSF buys a warehouse from a related company for 500,000 dollars, despite a market valuation showing it is worth 650,000 dollars. Because the purchase was not at market value, the ATO can apply NALI rules.

Years later, the fund sells the warehouse and makes a 330,000 dollar gain. Instead of being taxed at the concessional rate, the entire gain is taxed at 45%. For further details, ATO's official page on Non-arm’s Length Income.

How ECPI affects capital gains tax in our SMSF

If an SMSF is entirely in the pension phase for the whole financial year, capital gains on assets supporting those pensions are typically exempt from tax. If the fund is in both the accumulation and pension phases, the exempt portion will depend on the actuarial percentage.

Important points for trustees:

• ECPI only applies to income from retirement-phase assets
• Actuarial certificates are required for mixed-phase funds
• The timing of the sale affects the exempt portion

How are SMSFs taxed on capital gains?

The table below helps you understand how SMSFs are taxed under different scenarios

Common CGT mistakes SMSF trustees make

Many trustees understand the basics of capital gains, yet errors still occur during the year that can affect the final tax outcome. Some of the most common issues include:

• Poor record-keeping for cost-based items such as legal fees or improvement costs
• Incorrect treatment of improvements as repairs
• Entering transactions with related parties that trigger NALI
• Failing to apply carried-forward capital losses
• Assuming all pension assets are automatically exempt without checking the actuarial percentages

These issues can lead to higher taxes, incorrect reporting or audit concerns. Addressing them early ensures a more accurate CGT position.

Strategies SMSFs use to reduce CGT

Several strategies can help SMSFs manage capital gains throughout the year:

• Using available capital losses to reduce gains
• Ensuring documentation for all improvement costs is complete
• Checking whether the one-third discount applies before selling an asset
• Maintaining the SMSF compliance status

These steps can create a more efficient tax outcome for the fund.

Final thoughts

Capital gains inside an SMSF depend on timing, the phase of the fund and how well records are maintained. Keeping this in mind, it helps to review cost bases during the year and keep evidence of any improvement costs so the gain is calculated correctly.

Making sure every transaction is completed at market value also protects the fund from NALI. When these steps are in place, it becomes easier to plan when an asset should be sold and whether capital losses can reduce the final amount.

If you need an extra set of eyes on the numbers or want to be sure everything has been captured properly, our SMSF tax accounting team is here to help you work through the details and stay compliant. You can book a call with our team if you would like support tailored to your fund.