When to Use SMSF Loans for Unit Purchases

Self-Managed Super Funds can no longer enter into new borrowing arrangements to purchase residential units. From 10 August 2026, Limited Recourse Borrowing Arrangements for real property are restricted to business real property only, which means residential units can only be acquired with cash or existing fund savings.

Why the Residential LRBA Restriction Matters for Unit Buyers

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 inserted a new condition into the Superannuation Industry (Supervision) Act that prevents SMSFs from borrowing to acquire residential property. This applies to all new arrangements entered into on or after 10 August 2026, regardless of whether the lender is a bank, non-bank lender, or related party. The restriction does not prohibit SMSFs from owning residential units outright. Funds with sufficient cash reserves can still purchase units without borrowing, provided the property is not acquired from a related party and will not be occupied by a member or related party.

Consider a trustee in Brabham with an SMSF balance of $480,000 who was planning to borrow an additional $320,000 to purchase an $800,000 unit in a nearby suburb. Under the previous framework, this arrangement would have been permissible through a Limited Recourse Borrowing Arrangement. Under the current law, that same trustee can only proceed if the fund has sufficient cash to cover the purchase price and associated costs without borrowing. Alternatively, the trustee would need to redirect the strategy toward a commercial property that satisfies the business real property definition.

How Existing Residential LRBAs Are Protected

SMSFs that exchanged a binding contract to acquire residential property before 10 August 2026 are not affected by the new restriction. This transitional protection applies even if the contract settles or the LRBA is entered into on or after that date. Later variations to the contract generally do not affect this protection, unless the changes are so significant that the fundamental terms no longer exist. Funds that held a compliant residential LRBA before 10 August 2026 can continue to hold that arrangement and can refinance it without the refinanced loan being subject to the post-commencement rules.

Refinancing in this context means entering into a new loan contract for the same asset, with the same or a new lender. The ATO considers an existing arrangement to end if there is a significant change to the terms or conditions, such as refinancing that is inconsistent with the original arrangement or changes to the ultimate beneficiaries. Where an existing arrangement ends, a new arrangement entered into on or after 10 August 2026 that involves residential property cannot proceed under an LRBA.

The Commercial SMSF Property Loan Alternative

Business real property under section 66 of the SIS Act can still be acquired using an LRBA. The definition requires 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 property marketed as commercial does not automatically satisfy the definition. Whether it qualifies depends on its actual use at the time of acquisition.

In Brabham, commercial property options include light industrial units in precincts near Marshall Road or office suites servicing the growing north-eastern corridor. These properties can be leased to third parties or to a related party business on arm's length terms. Where the SMSF leases business real property to a related party, the lease must be at market value and the property is excluded from the in-house asset rules. The fund must also meet the borrowing capacity requirements set by the lender, which typically involve a loan-to-value ratio of 70 percent or lower for commercial SMSF property loans.

As an example, a trustee acquiring a $600,000 light industrial unit would require a deposit of at least $180,000, plus settlement costs and establishment fees. The borrowed funds must be used to acquire a single asset or a collection of identical assets with the same market value. Expenses such as loan establishment costs and stamp duty may also be covered, but borrowed funds cannot be used to improve an existing asset. Multiple real property titles cannot be acquired under a single LRBA unless the properties are identifiable, have equal market value, and are bought and sold together.

How the Holding Trust and Limited Recourse Structure Work

The asset being acquired under an LRBA must be held in a separate holding trust, often called a bare trust. The SMSF acquires a beneficial interest in the asset and obtains legal ownership after the loan is repaid. If the loan defaults, the lender's recourse is limited to the asset held in trust. The SMSF's other assets are protected. Investment returns from the asset, including rental income, flow to the SMSF.

The holding trust cannot be a discretionary trust or a unit trust in which the SMSF trustee is one of a number of unit holders. Superannuation law requires the SMSF trustee to have a beneficial interest in the asset and the right to acquire legal ownership after making one or more payments. The asset cannot be subject to any charge other than under the LRBA. A related party may provide a personal guarantee to the lender, but their recourse must also be limited to the asset under the arrangement and not any other SMSF assets.

Loan Interest Rates and Safe Harbour Compliance

The ATO publishes safe harbour interest rates for SMSF loans under Practical Compliance Guideline PCG 2016/5, which is updated annually. These rates apply to both real property and listed securities and are designed to ensure that LRBA arrangements meet arm's length terms. 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.

For commercial property LRBAs, variable rate loans are more common than fixed rate loans due to the longer settlement periods and the need for flexibility during construction or fit-out. The loan LVR for a commercial SMSF property loan is typically 70 percent, though some lenders may offer lower ratios for certain property types or borrower profiles. Deposit requirements therefore start at 30 percent of the purchase price, and trustees need to factor in additional costs such as valuation fees, legal fees, and stamp duty when calculating the total upfront commitment.

Tax Treatment of Rental Income and Capital Gains

A complying SMSF is taxed at 15 percent on its assessable income, including rental income and net capital gains. Where an eligible asset 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 varies depending on the property's adjusted cost base, acquisition and selling costs, capital improvements, capital works deductions, capital losses, and the fund's overall tax position for that year.

Where a fund's assets are fully segregated as current pension assets at all times during the income year, a capital gain on disposal of those assets is disregarded. From the 2022 financial year, where all of a fund's assets are paying retirement phase pension benefits at all times, the fund's assets are regarded as segregated current pension assets. Where the fund uses the proportionate method, the exemption applies only to the exempt proportion of the net capital gain, as determined by an actuarial certificate.

Division 296 Tax and Property Held Under LRBA

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 applies to the proportion of earnings above that higher threshold. For SMSF purposes, Division 296 fund earnings are an adjusted amount of the fund's taxable income. A capital gain must be realised through a CGT event for it to form part of the fund's assessable income and therefore the Division 296 earnings base.

An unrealised increase in property value does not constitute a CGT event and does not by itself produce assessable income or Division 296 fund earnings. Rental income and realised capital gains may contribute to the Division 296 calculation. LRBA amounts are disregarded when calculating a member's total superannuation balance for Division 296 tax purposes. An SMSF may elect to adjust the cost base of its CGT assets to market value as at 30 June 2026 for Division 296 fund earnings purposes. This election recognises accrued value prior to the commencement of Division 296 tax, applies to all CGT assets held directly by the SMSF at that date, and cannot be revoked.

Sole Purpose Test and Related Party Considerations

All SMSF investments, including commercial property held under an LRBA, must be maintained at all times for the sole purpose of providing retirement benefits for SMSF members. Decisions that give members or related parties a present-day benefit may contravene section 62 of the SIS Act. Business real property leased to a related party of the fund is excluded from the in-house asset rules, but any such lease must be made on arm's length terms at market value. The property cannot be occupied by a member or related party for private or domestic purposes.

Where the fund is considering a commercial property loan for a property that will be leased to a member's business, independent valuation and market rent assessment are essential to demonstrate compliance. The lease terms, rent review mechanisms, and outgoings apportionment must all reflect what an unrelated party would accept. This is particularly relevant for trustees in Brabham operating businesses in nearby commercial precincts who may see an opportunity to consolidate their business premises within their SMSF.

You should seek advice from a licensed SMSF specialist and an SMSF mortgage broker before entering into any arrangement. The rules are complex, and the consequences of non-compliance include penalties, loss of concessional tax treatment, and potential disqualification of the fund. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions