Why SMSF Loans Need a Bare Trust Structure

When you borrow through your Self-Managed Super Fund to acquire property, the structure protecting that transaction is not optional.

A Limited Recourse Borrowing Arrangement requires the asset to sit in a separate bare trust until the loan is repaid. That separation determines what happens if the loan defaults, how the asset is taxed while held, and whether your arrangement meets the conditions set out in the Superannuation Industry (Supervision) Act. Without that structure in place correctly, the borrowing does not qualify under the exception to the general prohibition on super fund borrowing.

What a Bare Trust Does in an SMSF Loan

A bare trust holds legal title to the property while your SMSF holds the beneficial interest and makes loan repayments. The trustee of the bare trust has no active duties beyond holding the asset and transferring legal title to the SMSF once the loan is fully repaid. All investment returns from the property, including rental income, flow to your fund during the loan term.

If the loan defaults, the lender's recourse is limited to the asset held in the bare trust. No other assets in your SMSF can be pursued to cover the shortfall. That limited recourse character is what allows the borrowing to proceed under sections 67A and 67B of the SIS Act.

The Single Acquirable Asset Rule

Borrowed funds under an LRBA can only be used to acquire a single asset, or a collection of identical assets with equal market value that can be treated as one. A commercial property on one title qualifies. Two neighbouring commercial properties on separate titles do not, even if they are substantially similar and purchased at the same time.

Consider a fund looking to acquire a small retail building and an adjoining warehouse, each on its own title. Even if both properties are purchased from the same vendor as part of one transaction, they cannot be held under a single LRBA. The fund would need to structure two separate borrowing arrangements, each with its own bare trust, or acquire one property without borrowing.

The borrowed funds can cover the property purchase price, loan establishment costs, and stamp duty. They cannot be used to improve an existing asset. Once the property is acquired and the loan is active, you cannot draw down additional funds from that loan to renovate or extend the building.

Why Residential LRBAs Are Now Restricted

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 changed the rules for new borrowing arrangements involving residential property. From approximately 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 can still hold existing residential investments and can acquire residential property without borrowing, provided the property is not acquired from a related party and will not be occupied by a fund member or their relatives. The restriction applies specifically to new borrowing arrangements.

Existing residential LRBAs entered into before the commencement date are protected under grandfathering provisions. Refinancing an existing residential LRBA may also be permitted, though the ATO had not published updated guidance on all refinancing scenarios as at late July 2026. Whether an arrangement qualifies for transitional protection depends on the specific documentation and timing, and you should seek advice from a licensed SMSF specialist before proceeding.

Business Real Property Definition for Commercial LRBAs

Business real property means land and buildings used wholly and exclusively in one or more businesses. The property must be used for business purposes at the time your fund acquires it. A property marketed as commercial does not automatically qualify if its actual use does not meet the definition.

A warehouse leased to an unrelated trading company for storage and distribution qualifies. An office building leased to a tenant conducting professional services qualifies. A property with a mix of commercial tenancies and a residential apartment does not, unless the residential component falls within a specific concession for primary production property, which applies only where a dwelling occupies no more than 2 hectares and the main use of the entire property is not domestic or private.

Where a property has mixed use, you need to assess the actual use carefully before proceeding with an SMSF loan. A property that does not satisfy the business real property definition cannot be acquired under an LRBA after the commencement date, even if partly used for business purposes.

How Rental Income and Capital Gains Are Taxed

Rental income received by your SMSF from a property held under an LRBA is taxed at 15 percent during the accumulation phase, after allowable deductions such as interest, property management fees, repairs, and depreciation. Where the property supports a retirement-phase income stream and the fund's assets are fully segregated, rental income may be exempt as exempt current pension income.

When the property is sold, any capital gain is included in the fund's assessable income. If the property has been held for at least 12 months, a one-third CGT discount may apply, producing a maximum effective rate of 10 percent on the discounted gain. The actual tax liability depends on the property's adjusted cost base, selling costs, capital improvements, and the fund's overall tax position for that year.

Where your fund has both accumulation and pension interests, the ECPI exemption may be partial. The outcome depends on whether the fund uses the segregated or proportionate method to calculate ECPI, and whether an actuarial certificate is required.

Division 296 Tax and Property Held in an LRBA

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

For Division 296 purposes, the value of an LRBA is disregarded when calculating your total superannuation balance. Only the net asset value of the property, minus the outstanding loan balance, is included in the balance. Rental income and realised capital gains from the property may contribute to the Division 296 earnings calculation, but an unrealised increase in property value does not by itself produce assessable income or Division 296 fund earnings.

Your SMSF may elect to adjust the cost base of its CGT assets to market value as at 30 June 2026. That election recognises accrued value prior to the commencement of Division 296 and applies only for the purpose of working out Division 296 fund earnings, not for other CGT calculations.

Related Party Leasing and Arm's Length Terms

Business real property can be leased between your fund and a related party without breaching the in-house asset rules, provided the lease is on arm's length terms at market value. A related party lease for residential property is not permitted, as residential property does not meet the business real property definition.

Where your SMSF borrows to acquire a commercial property and leases it to a related party business, the rental amount must reflect what an independent tenant would pay for that property in the same location and condition. The ATO publishes safe harbour interest rates for SMSF LRBAs under Practical Compliance Guideline PCG 2016/5. 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.

A related party may provide a personal guarantee to the lender, but their recourse in the event of default must also be limited to the asset under the arrangement, not to any other SMSF assets. That limited recourse character must be maintained throughout the life of the loan and through any refinancing arrangement.

What Happens When You Refinance an SMSF Loan

Refinancing an existing LRBA to a different lender or on different terms may be treated as ending the original arrangement and starting a new one, depending on the nature and extent of the changes. A significant change to the terms or conditions of the borrowing, or refinancing that is inconsistent with the original arrangement, may end the existing arrangement under the ATO's current position.

Where an existing residential LRBA is refinanced after the commencement date of the 2026 restriction, whether the refinanced loan qualifies for transitional protection depends on the specific circumstances. The legislation provides that maintaining or refinancing a borrowing under an arrangement entered into before the commencement date does not breach the new restriction, but detailed guidance on what constitutes maintaining or refinancing had not been published by the ATO as at late July 2026.

Refinancing of commercial loans held under an LRBA is not affected by the 2026 restriction. The refinanced loan must relate to the same single acquirable asset, maintain the limited recourse character of the original arrangement, and meet arm's length terms consistent with PCG 2016/5.

Call one of our team or book an appointment at a time that works for you. We work with SMSF trustees across Queensland to structure compliant borrowing arrangements and connect you with the right lending and legal support for your fund's property acquisition.

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