The SMSF residential borrowing ban is here — where to from here? An update for our SMSF trustee clients — August 2026 If you have been following the news over the winter, you will know that the rules around borrowing inside self-managed super funds have just changed in a significant way. From 10 August 2026, […]
The SMSF residential borrowing ban is here — where to from here?
An update for our SMSF trustee clients — August 2026
If you have been following the news over the winter, you will know that the rules around borrowing inside self-managed super funds have just changed in a significant way. From 10 August 2026, SMSFs can no longer enter into new limited recourse borrowing arrangements (LRBAs) to buy residential property. For many of our clients, property inside the SMSF has been a cornerstone of their retirement strategy, so it is natural to ask: what exactly has changed, does it affect my existing arrangements, and what are my options now? This article answers those questions in plain English.
The short version is this: the ban is on borrowing, not on owning. Your SMSF can still hold residential property, still buy residential property with cash, and still borrow to buy business real property such as commercial premises. Existing loans are fully protected. But the era of gearing a new residential investment inside super has, for now, come to an end — and that changes the planning conversation for many trustees.
What has actually changed?
The change was delivered by the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which received Royal Assent on 26 June 2026 and commenced 45 days later, on 10 August 2026 . The measure was not part of the Government’s original Budget package — it was inserted as a late-stage amendment to secure the Greens’ support for the broader capital gains tax and negative gearing reforms through the Senate . The SMSF Association has been sharply critical of the process, describing it as a significant change to the SMSF investment landscape progressed through a late-stage amendment without consultation or an evidence-based review .
In technical terms, the law changes the meaning of an “acquirable asset” under the LRBA provisions: from 10 August 2026, an LRBA can only be used to acquire real property if that property is business real property land and buildings used wholly and exclusively in one or more businesses . A standard residential investment property a house or apartment leased to tenants — does not meet that definition, so it can no longer be acquired with a new LRBA. Importantly, the restriction applies regardless of who the lender is: bank, non-bank lender, or a related party such as a member lending to their own fund .
The ATO has published detailed guidance confirming how the new settings work, and a few points are worth highlighting because they are easy to get wrong. First, the property must be business real property at the time the LRBA is entered into, and it must remain business real property for the entire life of the arrangement — if a commercial property financed under an LRBA stops being used in a business, the fund has breached the borrowing rules and compliance action may follow . Second, “commercially zoned” does not automatically mean business real property: vacant commercial land, mixed-use properties and hobby farms are among the edge cases that can fall outside the definition, so eligibility needs to be confirmed before contracts are signed, not at finance approval .What has not changed — protections for existing arrangements
If your fund already has a residential property loan in place, you can breathe easy on the fundamentals. The changes are prospective only, and three categories are expressly carved out :
-
Existing LRBAs entered into before 10 August 2026 continue unchanged — there is no forced sale, no requirement to unwind, and no change to your fund’s tax treatment.
-
Refinancing of those existing arrangements remains permitted. The ATO treats refinancing as entering a new loan contract for the same asset, with the same or a new lender .
-
Binding contracts exchanged before 10 August 2026 are protected even if settlement — and the LRBA itself — happens after that date. The ATO’s own example confirms an off-the-plan contract exchanged before the deadline remains valid even where finance is approved later and settlement occurs 12 months down the track .
It is equally important to be clear about what was not protected during the transition window. Simply establishing an SMSF, lodging a finance application, or holding an approval in principle before 10 August did not count — the protection hinged on a binding contract being exchanged . If you exchanged in time, your purchase can proceed; if you did not, the residential LRBA path is now closed. And note the ATO’s caution that if a pre-deadline contract is varied so significantly that its fundamental terms no longer exist, it may be treated as a new arrangement caught by the ban .
One further protection worth stating plainly, because there is misinformation circulating: the ban does not stop your SMSF owning residential property, and it does not touch the general tax concessions of super. An SMSF can still acquire residential property outright — with no borrowing, provided the purchase fits the fund’s investment strategy and the usual rules (including the prohibition on buying residential property from related parties) are met .
If you already have an SMSF property loan: the watch-outs
Grandfathering means your existing arrangement is safe in law, but “safe in law” is not the same as “no action required”. The most significant practical risk flagged by the SMSF Association is lender exit: with no new residential LRBA business to write, some specialist lenders are expected to close their books or leave the market, which could leave trustees “locked into an arrangement that in the future is no longer fit for purpose” with limited ability to switch providers . While refinancing is legally permitted, it is only useful if there is a competitive market of lenders willing to refinance a closed product category. If your loan is coming off a fixed rate or your lender’s pricing is drifting, reviewing your options sooner rather than later is prudent.
Refinancing also comes with hard boundaries that matter for planning. A refinance must be for the same asset — you cannot use it to release equity, cash out, or fund a different purchase, and the new loan cannot exceed the existing balance . For funds with related-party loans, the compliance discipline continues as before: the ATO’s safe harbour interest rate under PCG 2016/5 for real property has risen to 9.35% for 2026–27 (up from 8.95%), and variable-rate related-party loans must be recalculated from 1 July 2026 to stay within the safe harbour and avoid non-arm’s length income treatment, which taxes affected income at the top marginal rate .
Finally, keep the fundamentals in view: your property must still be valued at market value each year for the annual return, and the ATO has flagged valuation breaches as a growing problem — they made up over 12% of all SMSF contravention reports in 2024–25 . With the lending landscape shifting, this is a good year to have your loan structure, documentation and investment strategy reviewed together rather than in isolation.
If you were planning to buy: where to from here?
This is the question most clients are asking, and the honest answer is that the strategy menu has changed rather than disappeared. Property inside an SMSF remains viable, what has closed is one particular funding mechanism. The right path now depends on your fund’s balance, your timeframe, and whether you are a business owner. Here are the realistic options.
Option 1: Buy residential property outright — and build the balance deliberately
The simplest route is also the one the ban deliberately leaves open: purchase residential property with cash already in the fund, no borrowing at all . The obvious constraint is scale — with the average SMSF holding around $1.63 million (median roughly $933,000) , many funds cannot comfortably buy a quality property outright without concentrating the portfolio in a single illiquid asset. Concentration risk, liquidity for pension payments, and diversification all need to be weighed before going all-in on one property.
What has improved, somewhat quietly, is the firepower available to build balances faster. From 1 July 2026 the concessional contributions cap rose to $32,500 and the non-concessional cap to $130,000, with eligible members able to bring forward up to $390,000 in a single year if their total super balance was under $1.84 million at 30 June 2026 . For couples, that is potentially $780,000 of after-tax contributions in one year between two members, plus carry-forward concessional caps for those with balances under $500,000, and $300,000 downsizer contributions for eligible over-55s selling the family home . A “save-then-buy” strategy inside super is slower than gearing, but it is now materially faster than it was, and it carries none of the compliance complexity of an LRBA.
Option 2: Pivot to business real property — borrowing is still available
The ban has a deliberate carve-out that keeps the door wide open for business owners: LRBAs remain fully available for business real property — offices, warehouses, retail premises, industrial property, medical suites and farms used wholly and exclusively in a business . For a business owner, the classic strategy is untouched: the SMSF borrows to buy the premises, the business leases them from the fund at market rent on arm’s-length terms, and rent that was building a landlord’s wealth instead builds the family’s retirement savings inside the concessionally taxed super environment . Business real property also retains its unique related-party privileges it is the one property type an SMSF can buy from a member or lease to a member’s business .
Two cautions apply. The definition is stricter than it looks: the property must be used wholly and exclusively in a business at purchase and for the life of the loan, and mixed-use or partially vacant properties can fail the test . And while residential property can occasionally qualify — SMSFR 2009/1 accepts cases such as a house used exclusively as a doctor’s surgery, a genuine bed-and-breakfast business, a strata hotel unit, or a large residential portfolio run as a full-time property investment business — a typical investment rental will never qualify, and contriving short-term “business use” to get a loan through is exactly the kind of arrangement the ATO warns against . Get a written opinion on business real property status before you commit.
Option 3: Co-invest through compliant structures
Where the fund cannot buy alone, co-investment structures let an SMSF participate alongside other parties — including related parties — without borrowing. Under a tenants-in-common arrangement, the SMSF and another party each fund their ownership share from their own money; the property must remain unencumbered, and the SMSF cannot later buy out a related party’s share of a residential rental . A section 13.22C unit trust (an ungeared unit trust) offers more flexibility: the SMSF can buy units alongside related parties and can acquire their units over time at market value but the trust cannot borrow, cannot run a business, and breaching the strict conditions turns the units into in-house assets .
These structures are not a backdoor to gearing the common thread is that nobody in the structure borrows. They suit families or business partners pooling resources, and they demand careful setup: trust deeds, unit issue pricing, and the in-house asset rules all need professional attention. Used properly, they let a fund take a proportional interest in a property it could not afford alone, with a pathway to full ownership over time.
Option 4: Take property exposure without direct ownership
Trustees who wanted residential exposure for diversification rather than for a specific property can achieve it far more simply: listed property trusts (A-REITs), property ETFs, and unlisted property funds give diversified residential, commercial and industrial exposure with daily liquidity, no Land Tax or stamp duty on entry, and none of the LRBA compliance overhead. SMSFs already hold around $69 billion in listed trusts , and these vehicles fit neatly inside an investment strategy that also holds shares and cash. The trade-off is real: you give up the control, the specific asset selection, and the tangible “bricks and mortar” feel that draws many trustees to direct property and prices move with equity markets in the short term. But for funds whose attraction to residential property was really an attraction to property-like returns, this is often the most honest substitute.
It is also worth remembering that LRBAs themselves are not dead they remain available for listed shares and units and for business real property . A trustee who primarily wanted gearing inside super, rather than residential property specifically, still has compliant ways to achieve it.
Option 5: Reconsider whether the property belongs in super at all
The same tax reform package that produced the LRBA ban also changed the maths outside super. From 1 July 2027, the 50% CGT discount for individuals, trusts and partnerships is replaced by cost-base indexation plus a 30% minimum tax on capital gains, and negative gearing on established residential property is restricted to new builds (existing properties held before Budget night on 12 May 2026 are grandfathered) . Notably, complying superannuation funds are excluded from both the indexation regime and the negative gearing quarantining — super keeps its one-third CGT discount and its existing settings .
The planning consequence cuts both ways. For some clients, buying the next investment property personally or in a trust may now make sense again, particularly where the fund lacks the balance to buy outright and the investor wants interest deductibility (on new builds) or flexibility. For others, the super environment’s relative advantage has actually increased, since super was spared the CGT and negative gearing tightening applied elsewhere. This is now a genuinely two-sided comparison that needs to be modelled on your numbers, not assumed.
The options side by side
| Pathway | Borrowing allowed? | Related-party dealings | Key constraints | Best suited to |
|---|---|---|---|---|
| Outright residential purchase | No | Cannot buy from or lease to related parties | Concentration and liquidity risk; needs large balance | Funds with substantial cash seeking a specific asset |
| Build balance via contributions, then buy | No | Same as above | Caps apply: $32,500 CC / $130,000 NCC / $390,000 bring-forward | Members 5+ years from purchase |
| LRBA over business real property | Yes | Can buy from and lease to related parties at market value | Must remain business real property for life of loan | Business owners; commercial investors |
| Tenants in common | No (property must be unencumbered) | Co-own with related parties; no buy-out of resi share | Rigid exit options | Families co-investing |
| s13.22C ungeared unit trust | No | SMSF can acquire related parties’ units over time | Strict ongoing conditions; in-house asset risk | Staged path to full ownership |
| Listed property / A-REITs | n/a | n/a | Market volatility; no asset control | Diversification seekers |
| Geared LRBA over listed shares | Yes | Related-party loans under safe harbour | 50% LVR, 7-year term under safe harbour | Trustees wanting leverage, not property |
The bigger picture — and what may happen next
Some context helps keep the change in proportion. SMSFs hold about $62.7 billion of residential property against $120.1 billion of commercial property, within a $1.06 trillion sector; total SMSF borrowings of $29.4 billion represent just 2.78% of sector assets, and only about one in ten funds holds residential property at all . The Government’s justification leaned on housing affordability and systemic risk, noting SMSFs account for a small share of residential lending . Industry data tells a bigger story than Treasury assumed: non-bank lenders report over 16,000 new residential SMSF loans written in FY2026 with $10.3 billion in security — four to five times the ATO’s estimate of 4,000 a year — at a conservative average LVR of 67% .
There is also a live policy debate that clients should know about. The SMSF Association has warned the ban could delay or stop construction of up to 20,000 new homes a year, given SMSF purchasers represent an estimated 30–60% of investor-led off-the-plan sales that developers rely on for pre-sales . The finance industry association AFIA is not seeking reversal but is lobbying for a targeted exemption for new dwellings, using the “new residential dwelling” definition already legislated in the same Act . Whether that succeeds is uncertain — but it means the rules could evolve, and knee-jerk restructures based on today’s settings alone are unwise.
What we suggest you do now
If you have an existing residential LRBA: do nothing rash, your arrangement is protected. But do schedule a review of your loan’s rate, remaining term and lender position, because refinancing options may narrow as lenders exit; confirm any related-party loan reflects the 9.35% safe harbour rate from 1 July 2026; and make sure your annual property valuation evidence is audit-ready .
If you exchanged a contract before 10 August 2026: confirm with us that your contract, holding trust and loan documents are correctly in place — settlement after the deadline is fine, but the paperwork must match the transitional rules, and significant contract variations can forfeit protection .
If you were planning a geared residential purchase: let’s revisit the strategy on its merits. For business owners, the commercial property pathway is very much alive and arguably under-used. For others, the choice is between building the balance deliberately (the 2026–27 caps are the most generous in years), co-investing through a compliant structure, taking listed property exposure, or holding the investment outside super under the new tax settings. Each path has a different risk, liquidity and tax profile — and the right answer depends on your fund’s position, not on the headlines.
The rules are new, ATO guidance is still settling, and the details of your fund’s deed, investment strategy and loan documents matter more than ever.
This article is general information only and does not take into account your personal objectives, financial situation or needs. It is not financial, tax or legal advice, and it should not be relied upon as such. Before making any decision about your SMSF, borrowing arrangements or property investments, you should seek advice from a licensed financial adviser and consider whether the strategy is appropriate for your circumstances. Information is current as at 19 August 2026 and may change as further legislation and ATO guidance are released.
