Do you know SMSF residential loans are now banned?

From 10 August 2026, you can no longer use borrowed funds in your self-managed super fund to purchase a residential property.

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 has closed the limited recourse borrowing arrangement structure for residential purchases. If you exchanged a contract before that date, your arrangement remains protected. If you're planning to buy after that date, your options now centre on purchasing with existing fund assets or looking at commercial property instead.

What Changed Under the New Residential Ban

The legislation inserted a condition into the Superannuation Industry (Supervision) Act that restricts new limited recourse borrowing arrangements to business real property only. Residential property no longer meets the definition, regardless of whether it's a house, apartment, or newly constructed dwelling. The operative date is approximately 10 August 2026, being 45 days after Royal Assent on 26 June 2026.

The trigger for protection is the contract exchange date, not settlement. A contract exchanged on 9 August remains compliant even if settlement occurs months later. No action is required if you already hold a residential property under a valid LRBA entered before the commencement date.

Can You Still Buy Residential Property Through Your SMSF

You can still acquire residential property using existing super savings, provided you don't borrow to do so. The property must be purchased from an unrelated party and cannot be lived in by any fund member or related party. This has always been a condition under the sole purpose test.

Consider a trustee with $600,000 in their SMSF who wants to purchase an investment property. If they can fund the purchase entirely from existing super balances and cover stamp duty, legal fees, and any immediate repairs without a loan, the purchase remains available. Rental income flows into the fund and is taxed at 15 percent during accumulation phase, or zero percent if the member has commenced a pension and meets the conditions.

The difference now is that you cannot supplement those existing savings with borrowed funds through an LRBA structure. Your purchase capacity is limited to what the fund already holds.

Borrowing for Commercial Property Remains Available

Commercial property that satisfies the business real property definition under section 66 of the SIS Act is unaffected by the residential ban. Business real property means land and buildings used wholly and exclusively in one or more businesses.

A warehouse leased to an operating company, a retail shopfront tenanted by a cafe, or an office suite used by a professional practice can all qualify. The business doesn't need to be carried on by the SMSF itself. Where a property includes a dwelling that occupies no more than 2 hectares and the main use of the whole property is not domestic or private, it may still qualify as business real property.

Classification depends on actual use at the time of acquisition. Vacant land not currently used in a business, or mixed-use properties where the main use is domestic, may not meet the definition. The ATO's guidance in SMSFR 2009/1 sets out detailed examples of properties that do and don't qualify.

How Limited Recourse Borrowing Arrangements Work for Commercial Property

Under an LRBA, the asset is held in a separate holding trust, often called a bare trust. The SMSF acquires a beneficial interest in the asset and takes legal ownership once the loan is repaid. If the loan defaults, the lender's recourse is limited to the asset held in trust. No other fund assets are at risk.

The borrowed funds must be used to acquire a single asset or a collection of identical assets with the same market value. Loan establishment costs and stamp duty may also be covered by the borrowing. You cannot use borrowed funds to improve an existing asset or place an existing fund asset into an LRBA.

In our experience, funds purchasing commercial property under an LRBA need to meet higher deposit requirements than standard investment loans. Most lenders require a loan-to-value ratio no higher than 70 percent, meaning a 30 percent deposit plus costs. Some lenders set the ceiling lower depending on the property type and tenant profile.

SMSF Loan Interest Rates and Arm's Length Terms

Lenders price SMSF loans higher than standard residential loans due to the structural complexity and limited recourse nature of the arrangement. Variable rates for commercial property under an LRBA are typically higher than residential investment loan rates, and fixed rate options are less common.

The ATO publishes safe harbour interest rates under Practical Compliance Guideline PCG 2016/5. These rates are updated annually and apply to both real property and listed securities held under an LRBA. If the loan is provided by a related party and the interest rate falls below the safe harbour rate, the income may be treated as non-arm's length income and taxed at the highest marginal rate.

Any lease between the SMSF and a related party must also be on arm's length terms at market value. Business real property leased to a related party is excluded from the in-house asset rules, but the rental amount and lease conditions must reflect what an unrelated tenant would pay.

Refinancing Existing Residential LRBAs After the Ban

The legislation provides that the residential ban does not apply to maintaining or refinancing a borrowing under an arrangement entered into before the commencement date. Existing residential LRBAs remain protected.

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 starts a new one. Refinancing that is inconsistent with the original arrangement, borrowing to acquire an asset not contemplated under the original arrangement, or changes to the ultimate beneficiaries may all trigger a new arrangement.

If a refinanced loan is treated as a new arrangement entered into after 10 August 2026, it would be subject to the residential ban and potentially non-compliant. We regularly see this issue arise when trustees want to refinance to a lower rate or switch lenders. The safest approach is to seek advice from a licensed SMSF specialist and wait for updated ATO guidance before proceeding with any refinancing of a grandfathered residential LRBA.

What Division 296 Tax Means for Members with 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 tax applies to the proportion of earnings above that level.

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. This inclusion can push a member over the threshold and trigger the additional tax, even though the borrowed amount is not yet an asset of the fund.

A member with a total superannuation balance of $2.8 million and an outstanding LRBA of $400,000 entered into with a related party after 1 July 2018 would have a total superannuation balance of $3.2 million for Division 296 purposes. The proportion of earnings attributable to the $200,000 above the threshold would be subject to the additional 15 percent tax, effectively taxing those earnings at 30 percent rather than 15 percent during accumulation phase.

Using Existing Fund Assets or Contributions to Purchase Without Borrowing

If you want to acquire residential property through your SMSF after the ban takes effect, you'll need to fund the purchase entirely from existing savings or future contributions. The concessional contributions cap is $32,500 per annum from 1 July 2026, 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. This can accelerate the accumulation phase for members planning a property purchase, though it takes time to build sufficient balances if the fund is starting from a lower base.

Another option is to redirect rental income and investment returns from other fund assets toward a future property purchase. This approach works where the fund already holds a diversified portfolio and the trustees are prepared to wait until sufficient liquidity is available.

Purchasing with existing assets removes the interest cost and the structural requirements of an LRBA, but it also concentrates the fund's investments into a single illiquid asset. Diversification, liquidity for pension payments, and the member's age and retirement timeline all need to be considered.

Call one of our team or book an appointment at a time that works for you. We work with licensed SMSF specialists and can help you understand whether a commercial property loan, an asset purchase using existing fund balances, or a different structure suits your circumstances. You can find a time that suits you on our book appointment page.

Frequently Asked Questions