SMSF Borrowing Ban 2026: LRBA Rules for Property Explained

Quick answer: From 10 August 2026, a self-managed super fund can only use a new limited recourse borrowing arrangement (LRBA) to buy real property if the property is business real property, broadly commercial or farm property used wholly and exclusively in a business. New SMSF borrowing to buy residential property is no longer allowed. Loans that already existed are grandfathered and can be refinanced. So can purchases contracted before 10 August, even if they settled later. Borrowing to buy other assets, such as listed shares, is unaffected.

What changed on 10 August 2026

The ban is in Schedule 5 of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, the same Act that changed capital gains tax and negative gearing. It received Royal Assent on 26 June 2026, and Schedule 5 commenced on the 45th day after that: 10 August 2026.

The Act adds one condition to section 67A of the Superannuation Industry (Supervision) Act 1993, the section that lets SMSFs borrow at all: where the asset is real property, it must be business real property (as defined in section 66 of that Act).

Situation	Allowed after 10 August 2026?
New LRBA to buy a residential investment property	No
New LRBA to buy commercial property used wholly and exclusively in a business	Yes
LRBA entered into before 10 August 2026	Yes, it continues
Refinancing a borrowing that existed before 10 August 2026	Yes
New LRBA where the purchase contract was signed before 10 August 2026, settling after	Yes
New LRBA to buy listed shares or units	Yes, unaffected
SMSF buying residential property with cash, no borrowing	Yes, unaffected

Grandfathering and refinancing exceptions: Schedule 5, item 2 of the Act.

The ban applies to any real property that isn't business real property, not only houses and apartments. Land that isn't used wholly and exclusively in a business also falls outside the exception. If a property's status isn't clear-cut (mixed residential and business use, for example), get advice before signing a contract.

What counts as business real property

The ATO describes business real property as land and buildings used wholly and exclusively in one or more businesses. Both words matter. Its ruling SMSFR 2009/1 explains that "wholly" is about whether the entire property is used in a business, and "exclusively" is about whether the business use excludes any other use.

Business real property is also the main exception to the related-party rule. An SMSF generally can't buy assets from a member or related party, but it can buy business real property from them at market value. That's why the common structure is still allowed: a business owner's SMSF buys the premises the business operates from, and the business pays market rent to the fund.

How an LRBA must be structured

The basic rules for any SMSF borrowing, residential or not, didn't change. Under the ATO's LRBA guidance:

• One asset per loan. The money must be used to buy a single acquirable asset (or a collection of identical assets with the same market value, such as a parcel of the same shares).
• Held in a separate trust. The asset is held in a holding trust (often called a bare trust), with the SMSF owning the beneficial interest and the right to take legal ownership once the loan is repaid.
• Limited recourse. If the fund defaults, the lender can only claim that asset, not the fund's other assets.

Borrowing from a related party: the safe-harbour terms

Some SMSFs borrow from a member or a related company instead of a bank. The ATO's Practical Compliance Guideline PCG 2016/5 sets out "safe-harbour" terms: if a related-party loan meets them, the ATO accepts it as being on arm's-length terms. Using them is optional, but a loan that departs from them has to be shown to be arm's length some other way. For real property, the safe harbour requires:

• a loan of no more than 70% of the property's value, for residential and commercial property alike
• a maximum loan term of 15 years (less any earlier loans on the same asset if refinancing)
• monthly principal-and-interest repayments
• an interest rate at least equal to the ATO's published rate: 9.35% for 2026–27 for real property (11.35% for listed shares). A fixed rate is allowed for up to five years before it must switch to variable.

The 9.35% rate is reset each income year; for comparison, it was 8.95% in 2025–26.

Why "arm's length" matters: the 45% tax risk

If a related-party loan is on better-than-commercial terms (say 2% interest, or no repayments), the income the property earns can be treated as non-arm's-length income. That income is taxed at 45% instead of the usual 15%. For general fund expenses that are below market (for example, accounting work provided free by a member's firm), the non-arm's-length income is calculated as twice the difference between what was paid and the market price. On a commercial property earning $60,000 a year in rent, the difference between 15% and 45% tax is $18,000 a year.

How borrowing interacts with Division 296

Division 296 adds 15% tax on the earnings attributable to a total super balance above $3 million (and a further 10% above $10 million), from 2026–27. Two details matter for SMSFs with property loans:

• Loan amounts are excluded from the balance used for Division 296. The ATO's guidance says LRBA amounts are disregarded when calculating your total super balance for Division 296 purposes.
• Earnings are based on the fund's taxable income, not paper gains. For SMSFs, Division 296 fund earnings are an adjusted amount of the fund's taxable income, and the fund can elect to reset its assets' cost bases to their market value at 30 June 2026, so growth before the tax began isn't counted. An earlier version of the policy would have taxed unrealised gains; the version that became law does not.

Auditors: what's actually being enforced

Every SMSF needs an independent, ASIC-registered auditor each year, and an auditor can't audit a fund whose financial statements their own firm prepared, except for routine or mechanical work. ASIC acted against 28 SMSF auditors between July and December 2025: 4 disqualified, 2 given extra conditions and 22 registrations cancelled. It singled out these "in-house" audits, noting an ATO review indicated up to 800 auditors may still be doing them.

For trustees, two checks take a few minutes:

1. Confirm your auditor's registration on ASIC's professional registers.
2. If the same firm prepares your accounts and audits the fund, ask how it meets the independence requirements, or use a separate auditor.

If you were planning to buy residential property in your SMSF

Borrowing is off the table for new residential purchases, but the alternatives are worth weighing honestly:

• Buy with cash in the fund. Still allowed, but it usually means a large fund balance concentrated in one illiquid asset.
• Buy outside super. Personal borrowing and negative gearing rules apply instead; note that, under Schedule 2 of the same Act, losses on established dwellings acquired after 7:30pm on 12 May 2026 can no longer be offset against other income from the 2027–28 income year (new builds are exempt). Our rental income tax calculator shows the cash-flow side.
• Invest the SMSF in listed property or diversified assets. Property ETFs and REITs give real estate exposure without borrowing, concentration or a single tenant.

Use the Superannuation Calculator to see how different contribution and return assumptions change your fund balance over time before committing to any single large asset.

Frequently asked questions

Related calculators and guides

• Superannuation Calculator
• Rental Income Tax Calculator
• SMSF vs industry super fund
• Division 296 tax explained
• Gold in your SMSF
• CGT changes from 1 July 2027

This article is for general information only and does not constitute financial, tax or legal advice. Individual circumstances vary. Consult a registered tax agent or licensed financial adviser before making decisions based on this information.