Unlock the secrets to SMSF property loans after 2026

Using your super to purchase property through a Self-Managed Super Fund is no longer the same proposition it was twelve months ago.

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June and commenced on 10 August. From that date, new limited recourse borrowing arrangements involving residential property are no longer permitted under the Superannuation Industry (Supervision) Act 1993. Your fund can still hold or acquire residential property without borrowing, and commercial property borrowing remains available, but the lending structure many trustees relied on has changed.

If you were considering residential property for your SMSF or already hold an existing arrangement, the immediate question is whether your intentions are still viable and on what terms.

What Changed on 10 August 2026

New LRBAs can only be used to acquire business real property as defined under section 66 of the SIS Act. Residential property does not meet that definition. This does not prevent your SMSF from owning residential property. Your fund may acquire residential property without borrowing, provided the acquisition complies with the related party and sole purpose rules. Existing residential LRBAs entered into before 10 August are protected under grandfathering provisions, and certain refinancing arrangements may also be protected. Whether an arrangement qualifies for transitional protection depends on the legal documentation and surrounding circumstances, not simply the exchange of a contract.

Consider a trustee who exchanged contracts on a residential property in late July but did not settle until September. Whether the LRBA was entered into before the commencement date is a legal question involving the terms of the loan agreement, trust deed, and any side arrangements. Assumptions based on contract exchange alone may be incorrect. In that scenario, the trustee would need legal advice from an SMSF specialist to determine whether the arrangement qualifies for protection or whether it is treated as a new LRBA subject to the restriction.

Refinancing an Existing Residential LRBA

Maintaining or refinancing a borrowing under an arrangement entered into before 10 August is not subject to the restriction. The ATO had not published updated guidance on refinancing as at 22 July, but Practical Compliance Guideline PCG 2016/5 remains current. Under the ATO's existing position, a significant change to the terms or conditions of an LRBA ends the arrangement and a new one begins. Circumstances that may end an existing arrangement include refinancing that is inconsistent with the original arrangement, borrowing to acquire an asset not contemplated under the original arrangement, and changes to the ultimate beneficiaries of the arrangement.

If your SMSF holds a residential LRBA and you are considering refinancing to a lower rate or a different lender, document the original arrangement carefully and obtain advice before proceeding. A refinancing treated as a new arrangement entered after 10 August would not be permitted under the post-commencement rules.

Commercial Property LRBAs Remain Available

LRBAs for commercial property that satisfies the definition of business real property are not affected by the restriction. Business real property means land and buildings used wholly and exclusively in one or more businesses. The business does not need to be carried on by the entity holding the interest in the property. Whether a property satisfies the definition depends on its actual use at the time of acquisition and is a question of fact.

A property marketed or described as commercial does not automatically satisfy the definition. Detailed guidance is set out in SMSFR 2009/1. A warehouse in Silverwater leased to an unrelated manufacturing business on arm's length terms would ordinarily qualify. A mixed-use property in Parramatta with ground-floor retail and upper-level residential apartments would require careful assessment. The residential component may cause the property to fail the wholly and exclusively test, or only the commercial portion may qualify, depending on the specific circumstances and the fund's ability to acquire a stratum title interest in the commercial component alone.

If your SMSF is considering a commercial property loan, the assessment of whether the property qualifies as business real property should be completed before any contract is exchanged. The character of the property is determined by its actual use, not its zoning or marketing description.

How the LRBA Structure Works

Borrowing money is generally prohibited for superannuation funds under the SIS Act. Sections 67A and 67B provide an exception through the limited recourse borrowing arrangement. Under an LRBA, the asset is held in a separate holding trust, usually a bare trust. The SMSF acquires a beneficial interest in the asset and obtains legal ownership after the loan is repaid. If the loan defaults, only the asset held in trust is at risk. Investment returns from the asset flow to the SMSF.

The borrowed money must be used to acquire a single asset, or a collection of identical assets with the same market value that can be treated as a single asset. Expenses such as loan establishment costs and stamp duty may also be covered. Borrowed funds cannot be used to improve an existing asset. The asset cannot be subject to any charge other than under the LRBA. An existing fund asset cannot be placed into an LRBA.

Multiple real property titles cannot be acquired under a single LRBA unless the properties are distinctly identifiable as a single asset, meaning they are identifiable, have equal market value, and are bought and sold together. Properties on separate titles in different suburbs do not qualify even if substantially similar.

Tax Treatment in Accumulation and Pension Phase

A complying SMSF is taxed at 15 percent on its assessable income, including net capital gains. Where an eligible asset has been held for at least 12 months, a one-third CGT discount may apply, which can produce a maximum effective rate of 10 percent on the discounted gain. The actual tax liability varies depending on the property's adjusted cost base, acquisition and selling costs, capital improvements, capital works deductions, capital losses, and the fund's overall tax position for that year.

A capital gain is not automatically exempt because an SMSF has commenced a pension. SMSFs can receive a tax exemption on investment income from assets that support a retirement-phase income stream, called exempt current pension income. Where a fund's assets are fully segregated as current pension assets, a capital gain on disposal of those assets is disregarded. Where the fund uses the proportionate method, the exemption applies to only the exempt proportion of the net capital gain, as determined by an actuarial certificate. The outcome depends on the method used to calculate ECPI, the transfer balance cap, whether an actuarial certificate is required, whether minimum pension payment requirements have been satisfied, and the fund's specific circumstances.

Division 296 Tax and Large Balances

From 1 July 2026, where a member's total superannuation balance at the end of the financial year exceeds $3 million, Division 296 tax of 15 percent applies to the proportion of earnings attributable to the amount above that threshold. Where the balance exceeds $10 million, an additional 10 percent Division 296 tax applies to earnings above that threshold. Both thresholds are subject to indexation.

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 for it to form part of the fund's assessable income and therefore the Division 296 earnings base. An unrealised increase in property value does not by itself produce assessable income or Division 296 fund earnings. Rental income and realised capital gains may contribute to the Division 296 calculation. LRBA amounts are disregarded when calculating a member's total superannuation balance for Division 296 tax purposes.

An SMSF may elect to make a CGT adjustment to the cost base of its CGT assets to market value as at 30 June 2026. This election recognises accrued value prior to the commencement of Division 296 and applies to all CGT assets held directly by the SMSF at that date. The election applies only for the purpose of working out Division 296 fund earnings.

Contributions and Borrowing Capacity

The concessional contributions cap is $32,500 per annum from 1 July 2026. The non-concessional contributions cap is $130,000 per annum. The general transfer balance cap has increased to $2.1 million. The bring-forward arrangement allows non-concessional contributions of up to $390,000 over three years where the member's total superannuation balance on 30 June of the previous year was below $1.84 million.

When assessing borrowing capacity for an SMSF loan, lenders consider the fund's existing balance, projected contributions, the member's age and proximity to preservation age, the rental yield on the property, and the fund's capacity to meet loan repayments from contributions and rental income without breaching the sole purpose test. Rental income alone is rarely sufficient to service an SMSF loan. The fund must have sufficient liquidity to meet loan repayments, property expenses, and minimum pension payments where applicable, without selling the asset or breaching contribution caps.

Loan-to-value ratios for SMSF loans are typically lower than for standard investment loans, with most lenders offering a maximum LVR of 70 to 80 percent depending on the property type and the fund's circumstances. Interest rates on SMSF loans are generally higher than standard investment loan rates, reflecting the additional complexity and limited recourse character of the arrangement. Variable and fixed rate options are available, though not all lenders offer fixed terms for SMSF loans.

Leasing to Related Parties

Business real property leased between the fund and a related party of the fund is excluded from the in-house asset rules under the SIS Act. Any such lease must be made on arm's length terms at market value. The related party cannot occupy residential property held by the SMSF under any circumstances, whether the property was acquired with or without borrowing. This restriction applies to all SMSF-held residential property and is not limited to LRBAs.

Income from an arrangement that does not meet arm's length terms may be assessed as non-arm's length income and taxed at 45 percent. The ATO publishes safe harbour interest rates for SMSF LRBAs under PCG 2016/5, updated annually, applying to both real property and listed securities. PCG 2016/5 applies to SMSF trustees who have established LRBAs regardless of whether the arrangement commenced before or after the date of publication of that guideline.

If you are considering purchasing property through your SMSF or need to assess whether an existing arrangement qualifies for transitional protection, the decision involves superannuation law, tax law, and trust law. SAT Home Loan works with dual-qualified SMSF specialists and can connect you with the right advice at each stage of the process. Call one of our team or book an appointment at a time that works for you.

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