New legislation has changed what you can buy with borrowed funds through your self-managed super fund.
From approximately 10 August 2026, new limited recourse borrowing arrangements can only be used to acquire business real property as defined under section 66 of the SIS Act. Residential units no longer qualify for SMSF loans because they do not meet that definition. This prohibition applies to all residential property, including new and existing apartments, regardless of their intended use as investment properties.
You can still purchase a residential unit 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 connected to a member. The restriction applies specifically to borrowing, not to outright purchase using accumulated superannuation savings.
What Happens to Contracts Exchanged Before the Ban
Existing limited recourse borrowing arrangements over residential property entered into before the commencement date are grandfathered. The trigger for protection is the date of contract exchange, not settlement. A contract exchanged before the operative date is protected even if settlement occurs after the ban takes effect.
Consider a scenario where trustees exchanged contracts on a two-bedroom unit in Parramatta in late July 2026 with settlement scheduled for September. That arrangement remains valid and compliant. The SMSF can proceed with settlement and continue making loan repayments under the original terms. No action is required by trustees with existing compliant residential arrangements entered before the ban commenced.
Mistake One: Assuming You Can Refinance a Grandfathered Residential Loan Without Consequences
The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 provides that the residential LRBA prohibition does not apply to maintaining or refinancing a borrowing under an arrangement entered into before the commencement date. However, the ATO had not published updated guidance on all aspects of the new law as at early July 2026.
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 post-commencement rules, meaning it would not be permitted for residential property.
If you hold a grandfathered residential unit under an LRBA and intend to refinance, obtain advice from an SMSF specialist before proceeding. The distinction between maintaining an existing arrangement and creating a new one will be critical for compliance.
Mistake Two: Relying on Outdated Advice About Mixed-Use Properties
Some trustees have been told that a unit with a home office or rental income from a business tenant might qualify as business real property. Business real property means land and buildings used wholly and exclusively in one or more businesses. A residential unit used partly for domestic purposes and partly for a home office does not satisfy the wholly and exclusively requirement.
Where the 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. This exception applies to rural properties with a homestead and farming activities, not to urban apartments or units.
Whether a property satisfies the business real property definition depends on its actual use at the time of acquisition. A vacant unit purchased with the intention of leasing it to a business tenant does not meet the definition if it is not actually being used in a business at the time of acquisition. Mixed-use properties where the main use is domestic or private may not qualify.
If your fund already holds accumulated capital and you want to acquire a unit without borrowing, residential property remains a permissible investment provided it is not acquired from a related party and is not occupied by a member or anyone connected to a member.
Mistake Three: Overlooking the Division 296 Tax Impact on High Balance Members
From 1 July 2026, where a member's total superannuation balance (TSB) at the end of the financial year exceeds the large super balance threshold (LSBT) of $3 million, Division 296 tax of 15 percent applies to the proportion of earnings attributable to the amount above the LSBT. This additional tax applies to earnings, not the balance itself, but it affects the net return on all fund investments including property held under an LRBA.
Outstanding LRBA amounts entered into on or after 1 July 2018 are included in a member's TSB 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 increases the TSB and may push a member over the threshold, triggering the additional tax on earnings.
In our experience, members with balances approaching the threshold often fail to model the impact of including an outstanding loan amount in their TSB calculation. A grandfathered residential LRBA with a substantial outstanding balance may tip a member into Division 296 tax liability even though the property itself generates rental income at concessional tax rates. The additional tax on earnings reduces the overall benefit of holding property in the fund compared to other investment structures.
If your TSB is close to the threshold and you hold a residential LRBA entered into on or after 1 July 2018, review whether the outstanding loan amount is included in your balance calculation and model the Division 296 tax impact on your projected earnings. In some cases, accelerating loan repayments or considering alternative investment structures may preserve more value over the long term.
The Shift Toward Commercial Property in SMSF Borrowing
LRBAs for commercial property that satisfies the definition of business real property under section 66 of the SIS Act are not affected by the 2026 residential ban. Trustees who were considering a residential unit purchase using borrowed funds may now evaluate commercial loans for properties such as retail units, small office suites, or industrial strata units.
The business in which the property is used does not need to be carried on by the entity holding the interest in the property. A commercial unit leased to an unrelated business tenant qualifies as business real property provided it is used wholly and exclusively in a business at the time of acquisition. The tenant's business activity satisfies the use requirement, not the fund's ownership.
Commercial property in an SMSF comes with different risk and return characteristics compared to residential investment. Lease terms are often longer, but vacancy periods can be extended and tenant fit-out costs may fall to the landlord. Borrowing capacity for commercial property depends on rental income and loan-to-value ratio, which may differ from residential lending criteria.
What You Can Still Do Without Borrowing
Accumulated superannuation savings can still be used to acquire residential units outright without a loan. This option remains available for funds with sufficient capital and members who meet contribution cap requirements. The concessional contributions cap is $32,500 per annum from 1 July 2026. 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 TSB on 30 June of the previous year was below $1.84 million. Members below this threshold can accelerate contributions to build fund capital for an outright purchase. Members with balances above the threshold face lower contribution caps and may need to rely on existing fund assets and investment returns.
Purchasing without borrowing removes the ongoing loan repayment obligation and eliminates the risk that changes to refinancing rules might affect an existing LRBA. It also avoids the inclusion of an outstanding loan amount in the TSB calculation for Division 296 tax purposes. The trade-off is that the fund must already hold sufficient capital, which may delay the purchase or require redirecting investment away from other asset classes.
We regularly see trustees who assumed they could always add borrowed funds to existing capital to reach their property purchase target. The residential borrowing ban has closed that option for new arrangements, making contribution planning and capital accumulation more important for members who want residential property exposure in their fund.
Understanding the Role of a Mortgage Broker in SMSF Lending
SMSF lending involves different documentation, trust structures, and compliance conditions compared to standard home or investment loans. A limited recourse borrowing arrangement requires a bare trust to hold the asset, with the SMSF as beneficiary. The loan agreement must specify that the lender's recourse is limited to the asset in the trust and does not extend to other fund assets.
Lenders offering SMSF loans assess the fund's financial position, the rental income from the property, and the trustees' capacity to make loan repayments from fund cash flow or ongoing contributions. Not all lenders participate in the SMSF lending market, and those that do may have different loan-to-value ratio requirements, interest rates, and security conditions.
A mortgage broker with SMSF experience can identify lenders who offer commercial property loans under limited recourse arrangements, structure the application to meet compliance requirements, and coordinate with the fund's solicitor and accountant to ensure the bare trust and loan documents align with SIS Act conditions. Since the residential ban commenced, some lenders have revised their SMSF loan products or withdrawn from the residential LRBA market entirely. Current information about which lenders remain active and what terms they offer is essential for trustees evaluating their options.
If your question is whether your fund should borrow to acquire property at all, or whether an outright purchase using existing capital makes more sense, start with your SMSF accountant or financial adviser. If the decision is to proceed with borrowing and the property qualifies as business real property, involve a mortgage broker to structure the loan and identify appropriate lenders.
The legislative change has closed the door on new residential unit purchases using borrowed funds, but it has not removed property as an asset class from SMSF investment. Your fund's ability to hold property now depends on accumulated capital, contribution capacity, and whether commercial property aligns with your investment strategy and risk tolerance. Those factors have always mattered, but the residential borrowing ban has made them decisive.
Call one of our team or book an appointment at a time that works for you to discuss your fund's position and the options available under the current legislative framework.
Frequently Asked Questions
Can I still buy a unit through my SMSF after the 2026 law change?
You can buy a residential unit using existing fund assets without borrowing. New SMSF loans from approximately 10 August 2026 can only be used for business real property, which excludes residential units.
What happens to my existing SMSF loan on a residential unit?
Existing limited recourse borrowing arrangements entered into before the commencement date are grandfathered and remain valid. No action is required if your arrangement was compliant when entered.
Can I refinance my grandfathered SMSF residential loan?
The law provides that the prohibition does not apply to maintaining or refinancing a borrowing entered before the commencement date. However, significant changes to the terms may end the existing arrangement and trigger the new rules, so obtain specialist advice before refinancing.
Does Division 296 tax affect my SMSF property investment?
If your total superannuation balance exceeds $3 million, Division 296 tax of 15 percent applies to the proportion of earnings above that threshold. Outstanding LRBA amounts entered into on or after 1 July 2018 may be included in your balance calculation in certain circumstances.
What property can I still borrow to buy through my SMSF?
You can borrow to acquire commercial property that satisfies the business real property definition, meaning land and buildings used wholly and exclusively in one or more businesses. Residential property does not qualify for new SMSF loans.
