Avoid these SMSF Property Loan Mistakes After 2026

New limited recourse borrowing arrangements for residential property through your SMSF became illegal from 10 August 2026.

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 inserted a condition into the Superannuation Industry (Supervision) Act that restricts new SMSF property loans to commercial and business real property only. If you exchanged a contract before that date, your arrangement is protected. If not, your options have narrowed.

The August 2026 Residential Ban and What It Protects

From approximately 10 August 2026, any new Limited Recourse Borrowing Arrangement can only be used to acquire real property that satisfies the business real property definition under section 66 of the SIS Act. Residential dwellings do not meet that definition, regardless of whether the property is newly constructed or an existing building. The law applies nationally and does not include exceptions based on property value, location, or fund balance.

Existing LRBAs over residential property are grandfathered. The trigger for protection is the date of contract exchange, not settlement. A contract exchanged on 8 August 2026 that settles in October is protected. A contract exchanged on 12 August is not.

Your SMSF can still acquire residential property using existing fund assets without borrowing. The property cannot be acquired from a related party and cannot be occupied by a fund member or anyone related to a member.

What Qualifies as Business Real Property for SMSF Borrowing

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 property. A commercial office leased to an unrelated tenant qualifies. A warehouse used by a related party business can qualify if the lease is at arm's length and the property is used wholly and exclusively for business purposes.

Where a property contains a dwelling for private or domestic purposes, it can still qualify if the dwelling occupies no more than 2 hectares and the main use of the whole property is not domestic or private. A rural property with a farmhouse may qualify if farming is the main use. A suburban house with a home office does not.

Classification depends on actual use at the time of acquisition. Vacant land not currently used in a business does not qualify. Mixed-use properties where the main use is domestic or private do not qualify. The ATO's guidance in SMSFR 2009/1 sets out detailed examples.

SMSF Commercial Loan Deposit and LVR Requirements

Most lenders offering SMSF loans for commercial property require a minimum deposit of 30 to 40 percent, limiting the loan-to-value ratio to 60 to 70 percent. Some lenders will consider higher LVRs for specific property types or where the fund has substantial other assets, but these are assessed on a case-by-case basis.

Consider a fund with a total balance of $850,000 looking to acquire a commercial unit for lease to an unrelated business. If the property is priced at the current market rate and the lender requires a 35 percent deposit, the fund would need $297,500 from existing assets, leaving $552,500 in the fund after settlement to cover stamp duty, legal fees, and ongoing costs. The loan amount would be around $552,500. That structure assumes the fund has sufficient liquidity and that contributions or rental income will service the loan.

Borrowed funds cannot be used to improve an existing asset. An SMSF cannot refinance an existing fund-owned property into an LRBA to release equity for improvements. The single asset rule applies: you cannot acquire multiple properties on separate titles under one LRBA unless they are identifiable as a single asset, have equal market value, and are bought and sold together.

Refinancing an Existing Residential LRBA After the Ban

The 2026 legislation provides that the residential LRBA prohibition does not apply to maintaining or refinancing a borrowing under an arrangement entered into before the commencement date. As at 2 July 2026, the ATO had not published updated guidance on the circumstances in which a refinancing arrangement might be treated as a new LRBA under the post-commencement rules.

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. A new arrangement entered into after the commencement date would be subject to the residential ban.

In practice, switching lenders or negotiating a lower rate on similar terms is less likely to create a new arrangement than consolidating multiple loans, adding additional security, or materially altering the repayment structure. The line between refinancing and replacing an arrangement is not always clear. We regularly see trustees who assume any lender switch is acceptable and do not seek advice until after the refinance has been signed.

Division 296 Tax and How It Affects SMSF Property Strategy

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 tax applies to the proportion of earnings above that higher threshold. Both thresholds are indexed in subsequent years.

Outstanding LRBA amounts entered into on or after 1 July 2018 are included in a member's total superannuation balance in certain circumstances, including where the LRBA is with an associate of the fund or where the member has satisfied a condition of release with a nil cashing restriction. The inclusion of the outstanding loan amount can push a member over the threshold even where the net equity in the property is below it.

As an example, a member with a total superannuation balance of $2.7 million who acquires a commercial property through an LRBA with an outstanding loan of $600,000 to a related party would have a reportable balance of $3.3 million if the conditions for inclusion are met. Earnings attributable to the $300,000 above the threshold would be subject to the additional 15 percent Division 296 tax. The effective tax rate on those earnings would be 30 percent rather than the standard 15 percent applied to SMSF investment income.

Arm's Length Terms and Safe Harbour Interest Rates

LRBAs must be made on arm's length terms. The ATO publishes safe harbour interest rates under Practical Compliance Guideline PCG 2016/5, updated annually. These rates apply to both real property and listed securities held under an LRBA. Income from an arrangement that does not meet arm's length terms may be assessed as non-arm's length income and taxed at the highest marginal rate.

For the period from 1 July 2025 to 30 June 2026, the published safe harbour rates for real property LRBAs ranged from 7.05 percent for a residential property loan at 70 percent LVR to 8.55 percent for a commercial property loan at 70 percent LVR. Actual rates offered by commercial lenders may be higher or lower depending on the lender's assessment of risk, the property type, and the fund's financial position.

Where the lender is a related party, the rate charged must fall within or above the safe harbour range. A loan from a related party at a rate below the safe harbour can trigger adverse tax consequences for the entire fund, not just the property held under the LRBA. Where the lender is unrelated, the rate is determined by the lender's commercial assessment and does not need to reference the safe harbour, though it should still reflect market terms.

Using Super to Buy Investment Property Without Borrowing

Your SMSF can acquire residential or commercial property using existing fund assets without entering into an LRBA. The property cannot be acquired from a related party unless it meets the business real property definition and is acquired at market value. The property cannot be lived in by a fund member or a related party of a member at any time, including before or after the member retires.

Contributions to fund a property purchase are subject to the usual caps. From 1 July 2026, the concessional contributions cap is $32,500 per annum and the non-concessional contributions cap is $130,000 per annum. 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.

Where multiple members are involved, contributions can be pooled to acquire a single property. The property is owned by the fund, not by individual members. Rental income and capital gains are allocated to member accounts in accordance with the fund's trust deed and investment strategy. This approach removes the complexity and cost of maintaining a bare trust and eliminates the limited recourse borrowing structure, but it requires sufficient accessible capital within the fund or the capacity to make further contributions within the caps.

If you are considering whether an SMSF property loan still makes sense under the new rules, or whether an existing arrangement can be refinanced without triggering the residential ban, call one of our team or book an appointment at a time that works for you.

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