When to Move Your SMSF Property into Pension Phase

Moving from Accumulation to Pension Changes How Your SMSF Property Is Taxed

When you shift your self-managed super fund into pension phase, the property you bought with borrowed money doesn't change hands, but the tax treatment does. Rental income that was taxed at 15 percent in accumulation can become tax-free once supporting a pension, and capital gains tax may be reduced or eliminated depending on how your fund is structured. The loan itself stays in place under the same terms, but the way you calculate tax on income and gains from that property shifts entirely.

This matters for members in areas like Roseworthy, where commercial property on the northern agricultural fringe or in nearby industrial zones might sit in an SMSF for years before the member retires. The timing of when you move into pension phase, how you structure your fund's assets, and whether you need an actuarial certificate all affect the tax outcome.

What Happens to Your SMSF Loan When You Start a Pension

The loan arrangement does not end or require refinancing when you transition to pension phase. The limited recourse borrowing arrangement continues under the same terms, with the same lender, same interest rate, and same repayment schedule. The property remains held in the bare trust until the loan is fully repaid, regardless of whether the fund is in accumulation or pension mode.

What does change is how rental income and loan interest are treated for tax purposes. In accumulation, rental income is assessable and deductible expenses such as loan interest reduce taxable income. Once the property supports a pension, that rental income may be exempt from tax under the exempt current pension income rules, but you also lose the ability to claim deductions against exempt income. The net position often favours pension phase, but the benefit depends on your fund's overall income, expenses, and whether the fund holds both accumulation and pension interests at the same time.

Consider a member who holds a small commercial workshop in the Roseworthy industrial precinct, leased to a local agricultural contractor. The property was acquired with an SMSF loan at 80 percent LVR. Rental income of around $18,000 a year was taxed at 15 percent in accumulation, with loan interest and other expenses reducing taxable income. When the member turned 65 and started an account-based pension, the rental income became fully exempt because the fund's assets were segregated to support the pension. The loan continued on the same terms, but the interest was no longer a deductible expense because the income it related to was now exempt.

Segregated Assets and the Proportionate Method

How much of your rental income and capital gain is tax-free depends on whether your fund uses segregated assets or the proportionate method. If all the fund's assets support a pension and none support accumulation interests, the assets are fully segregated and all investment income, including rent and capital gains, is exempt. If the fund has both pension and accumulation members, or a member with both types of interests, the fund must use the proportionate method and obtain an actuarial certificate to work out the exempt proportion.

Under the proportionate method, only part of the rental income and capital gain is exempt, calculated as the average value of pension liabilities divided by the average value of total fund liabilities across the year. This means a fund with $1.5 million in pension accounts and $500,000 in accumulation accounts would have an exempt proportion of 75 percent. Three-quarters of the rental income would be tax-free, and three-quarters of any net capital gain would be disregarded.

The calculation is done annually and fluctuates with contributions, pension payments, investment returns, and changes in account balances. A member who transitions mid-year will have a lower exempt proportion for that year because the pension was only in place for part of the period.

Capital Gains Tax When You Sell SMSF Property in Pension Phase

A capital gain on the sale of your SMSF property is not automatically tax-free just because the fund is paying a pension. The tax outcome depends on whether the asset was segregated, how long it was held, and whether the fund's position changed between acquisition and disposal.

Where a property has been fully segregated as a pension asset for the entire period since acquisition, any capital gain on disposal is fully disregarded. Where the property was held in accumulation and later moved into pension phase, the capital gain is calculated from the original cost base, but only the portion of the gain that relates to the period the asset supported a pension may be exempt. The proportionate method applies in the year of sale, and the fund's exempt proportion for that year determines how much of the gain is exempt.

In a scenario where a member held a commercial property in accumulation for eight years, then moved into pension phase and sold the property two years later, the entire holding period counts for the one-third CGT discount, but only part of the gain is exempt under the proportionate method. If the fund had only pension members at the time of sale, the full gain would be disregarded. If the fund still had accumulation interests, an actuarial certificate would determine the exempt portion.

This is particularly relevant for members holding commercial property near the Roseworthy agricultural college or along the northern transport corridor, where land values have shifted as the area develops. The timing of sale relative to pension commencement can produce very different tax outcomes on the same property.

Division 296 Tax and SMSF Property from 1 July 2026

From 1 July 2026, members with a total superannuation balance above $3 million are subject to an additional 15 percent tax on earnings attributable to the amount above that threshold. A further 10 percent applies to balances above $10 million. This tax applies to a calculated amount based on the fund's taxable income, not the actual increase in account balance, and is assessed at the member level.

For SMSF property, Division 296 tax only applies to realised income and gains. Rental income forms part of the earnings base. A capital gain is included only when a CGT event occurs, such as the sale of the property. An unrealised increase in property value does not trigger Division 296 tax. Importantly, the outstanding balance of an SMSF loan is disregarded when calculating total superannuation balance for Division 296 purposes, so a member with a property valued at $3.5 million and an outstanding loan of $1 million would have a total superannuation balance of $2.5 million, below the threshold.

Division 296 tax is separate from the fund's income tax and exempt current pension income rules. A gain that is exempt at the fund level under the pension exemption is still included in the Division 296 earnings calculation if the member's balance exceeds the threshold. This creates a tax outcome at the member level even where the fund itself pays no tax on the transaction.

When Refinancing or Restructuring Makes Sense

Refinancing an existing SMSF loan does not require you to move into or out of pension phase, but the two decisions can overlap when a member is approaching retirement. Refinancing might be considered to reduce the interest rate, switch from fixed to variable, or adjust the loan term to align with planned pension commencement.

Under current ATO guidance, refinancing an existing limited recourse borrowing arrangement is permitted provided the refinanced loan relates to the same asset, maintains the limited recourse character, and meets arm's length terms. The ATO publishes safe harbour interest rates annually, and a loan that does not meet those terms may be treated as non-arm's length income and taxed at 45 percent.

A member holding a commercial property acquired before the August 2026 restriction on new residential LRBAs can continue to refinance that loan on commercial terms. A member with a residential property under an existing arrangement entered into before the restriction may also refinance, provided the refinancing is treated as maintaining the original arrangement rather than entering into a new one. The ATO had not published updated guidance on this point as at late July 2026, and specialist advice should be obtained before proceeding.

Restructuring may also involve transferring part of a member's balance to pension phase while leaving part in accumulation, which affects the proportionate method calculation and may reduce the tax benefit from holding property in the fund. Where a member's balance is close to the transfer balance cap, careful planning is needed to avoid exceeding the cap or triggering excess transfer balance tax.

Minimum Pension Payments and Rental Income

Once you start a pension, the fund must pay you a minimum amount each year based on your age and account balance. The minimum percentage ranges from 4 percent for members under 65 to 14 percent for members 95 and over. These payments must be made in cash, and the fund needs sufficient liquid assets to meet the requirement.

Rental income from an SMSF property can be used to meet minimum pension payments, but only if the rent is actually received and available in the fund's bank account. Rent paid in arrears, or disputes with tenants, can create cash flow problems if the fund does not have other liquid assets. A fund that fails to meet the minimum pension payment for a year loses its pension exemption for that year, and all income becomes taxable at 15 percent.

This is a practical consideration for funds holding a single commercial property with limited other assets. A lease to a related party must be on arm's length terms, and if the related party's business experiences difficulty, the fund cannot simply forgive rent without breaching the sole purpose test and arm's length income rules.

Contributions After You Start a Pension

Starting a pension does not prevent you from making further contributions to your SMSF, but the contribution caps and transfer balance cap apply. The concessional contributions cap from 1 July 2026 is $32,500 per annum, and the non-concessional cap is $130,000 per annum. If your total superannuation balance at 30 June of the previous year was $2.1 million or more, your non-concessional contributions cap is nil.

Contributions go into accumulation phase, even if you have a pension running. This creates a mixed fund with both accumulation and pension interests, which requires the proportionate method and an actuarial certificate. The more you contribute after starting a pension, the lower your exempt proportion and the smaller the tax benefit from holding property in pension phase.

For members in the Roseworthy area still working in agriculture, transport, or local business while drawing a transition to retirement pension, this can be a point of confusion. You can keep working and contributing, but doing so reduces the tax benefit from the pension and may push your balance above the transfer balance cap if you are not careful.

Call one of our team or book an appointment at a time that works for you. We work with SMSF trustees across the Gawler region and north into the Barossa and Mid North, and we can walk through your specific situation, your fund's current structure, and whether moving into pension phase makes sense for your property and your retirement plans.

Frequently Asked Questions