On 23 June 2026, Treasurer Jim Chalmers announced that the government had agreed to restrict new limited recourse borrowing arrangements (LRBAs) for residential property inside SMSFs. The announcement formed part of an agreement intended to secure Senate support for the government’s broader tax reform package.
The law has now passed. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June 2026. Schedule 5 commences on 10 August 2026 and amends the LRBA exception so that, for real property, the asset must be business real property. The Act also includes carve-outs for pre-commencement arrangements, certain refinancing, and acquisitions entered into before commencement.
This article explains what changed, what remains available, and what trustees should check before entering, refinancing or restructuring an LRBA.
Key Takeaways
- From 10 August 2026, new LRBAs for real property will generally require the asset to be business real property.
- Existing residential property LRBAs entered into before commencement are carved out.
- Refinancing can be carved out where it maintains or refinances a borrowing under a pre-commencement arrangement.
- An acquisition can also be carved out where the related asset is acquired under an arrangement entered into before commencement, even if settlement happens later.
- SMSFs can still buy residential property outright using available fund money, provided the ordinary SMSF rules are met.
- Trustees considering a transaction, refinance or restructure should obtain advice based on the Act, the fund deed and the actual documents.
Contents
- How an SMSF limited recourse borrowing arrangement works
- The residential property borrowing change
- Existing SMSF property loans and grandfathering
- Residential property purchases without borrowing
- Business real property and mixed-use property LRBAs
- Why the government announced the LRBA ban
- The 10 August 2026 commencement and transition
- What the announcement means for different SMSF trustees
- Frequently Asked Questions
How an SMSF limited recourse borrowing arrangement works
SMSFs are generally prohibited from borrowing. An LRBA is a narrow exception under section 67A of the Superannuation Industry (Supervision) Act 1993 that can allow a fund to borrow to acquire a single asset while meeting strict conditions.
The purchased asset is usually held by a separate holding trustee until the loan is repaid. The SMSF has the beneficial interest, receives the investment income and makes the loan repayments. If the arrangement defaults, the lender’s statutory recourse is generally limited to the acquired asset rather than the fund’s other assets.
That limitation does not necessarily remove personal exposure. Loan documents may include trustee guarantees, and the consequences depend on the terms of the particular arrangement.
The SMSF Property Guide explains the structure in more detail, while the SMSF glossary definition of LRBA gives a concise overview. The ATO also maintains detailed guidance on limited recourse borrowing arrangements.
The residential property borrowing change
Schedule 5 of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 changes the LRBA exception in section 67A of the SIS Act. For an asset that is real property, the asset must now be business real property for a new arrangement entered into from commencement.
The practical position from 10 August 2026 can be summarised as follows:
| Situation | Current position |
|---|---|
| Buy residential property outright with available fund money | Remains available, subject to existing SMSF rules |
| Enter a new LRBA for residential property from 10 August 2026 | Closed unless a transition carve-out applies |
| Continue an existing residential property LRBA | Carved out where the borrowing arrangement was entered into before commencement |
| Refinance an existing residential property LRBA | Can be carved out where it maintains or refinances a borrowing under a pre-commencement arrangement |
| Complete a residential investment already underway | Can be carved out where the related asset is acquired under an arrangement entered into before commencement, even if settlement happens later |
| Enter an LRBA for business real property | Still possible if all LRBA, related party and arm’s length rules are met |
| Ordinary SMSF tax treatment of property | No change was announced |
This is a significant structural change for funds that expected to use leverage to buy residential property. It does not, however, remove residential property as an SMSF investment class.
How large is the LRBA market?
The Treasurer said SMSFs account for less than 1% of total residential property borrowing and less than 0.5% of new residential borrowing each year. Those figures explain why the government describes the market-wide effect as small.
The effect on an individual fund can still be substantial. A trustee whose investment plan depends on borrowing may need to reconsider asset selection, diversification, liquidity and whether the planned SMSF remains appropriate. Those are fund-specific decisions, not conclusions that can be drawn from the policy announcement alone.
Existing SMSF property loans and grandfathering
Existing residential property LRBAs entered into before the 10 August 2026 commencement are carved out from the amendment. An existing loan does not need to be unwound merely because Schedule 5 has passed.
Trustees would still need to meet all existing obligations, including repayments, arm’s length terms, record keeping, annual valuation and investment strategy requirements.
Refinancing is carved out, but documents still matter
The Act includes a carve-out for maintaining or refinancing a borrowing of money under another arrangement entered into before commencement. That is materially clearer than the original announcement.
That does not mean every change is automatically safe. Trustees considering a lender change, term extension, increased borrowing or material restructure should have the existing loan, proposed refinance, holding trust and fund deed reviewed before signing.
Residential property purchases without borrowing
The 2026 amendment targets the LRBA borrowing exception, not ownership. An SMSF with sufficient available money can still purchase residential investment property outright under the existing rules.
Those rules remain strict. Residential property generally cannot be acquired from, leased to or used by a member or related party. The investment must satisfy the sole purpose test, align with the fund’s documented strategy and be made on arm’s length terms. The SMSF Rules and Limits Reference summarises these restrictions.
The SMSF tax position was not part of the announcement
No change was announced to the ordinary tax treatment of property held by a complying SMSF. Eligible assets held for more than 12 months may still receive the one-third CGT discount in accumulation phase. Exempt current pension income may apply where assets support retirement-phase liabilities and the relevant conditions are met.
Tax outcomes depend on the fund’s circumstances and compliance. They should not be treated as a reason, by themselves, to acquire property or establish an SMSF.
Worked example: outright purchase compared with an LRBA
Consider a two-member SMSF with $1.2 million in assets, including $400,000 in cash and term deposits.
Before 10 August 2026, the fund may be able to use $400,000 as equity, borrow another $400,000 through a compliant LRBA and purchase an $800,000 residential investment property.
From 10 August 2026, that borrowing option generally closes for a new residential purchase unless a transition carve-out applies. The fund could still consider property within its available resources, but selling other assets to fund a larger purchase would alter diversification and liquidity. Whether either course is appropriate requires a review of the fund’s investment strategy requirements and professional advice.
Business real property and mixed-use property LRBAs
The enacted amendment does not simply say “commercial property.” It says that, for real property, the asset must be business real property within the meaning of section 66 of the SIS Act.
This distinction matters for small business owners whose SMSF owns, or is considering acquiring, business premises. A property that qualifies as business real property may still be acquired under an LRBA if every other LRBA, related party, arm’s length, borrowing and holding trust rule is met.
Mixed-use property needs careful advice. A trustee should not assume that a shop-and-dwelling, short-stay accommodation asset, farming property with a residence, or other mixed-use asset qualifies for an LRBA merely because part of it is commercial or business-related.
Why the government announced the LRBA ban
The change was announced as part of negotiations over the government’s 2026 tax reform package. That package proposes changes to capital gains tax and negative gearing for investors outside super, while complying super funds remain outside those particular reforms. Our SMSF Budget 2026 analysis explains that broader context.
Restrictions on SMSF borrowing have been considered before. The 2014 Financial System Inquiry recommended removing the LRBA exception. The Treasurer also referred to later Council of Financial Regulators reviews that identified risks for individual fund members even where the arrangements did not create systemic financial risk.
Direct property can concentrate a fund in one illiquid asset. Borrowing adds interest-rate, cash-flow and refinancing risk. The 2026 LRBA change is broader than a disclosure or lending standard: for new residential arrangements, it generally removes the borrowing pathway unless a carve-out applies.
The SMSF Association continued to argue at its 2026 Technical Summit that policy should target harmful conduct and poor advice rather than the SMSF structure itself. Our Technical Summit 2026 summary covers that broader policy context.
The 10 August 2026 commencement and transition
Schedule 5 commences on 10 August 2026, which is the 45th day after Royal Assent on 26 June 2026.
The Act includes two important carve-outs. The amendment does not apply to the extent that:
- the arrangement maintains or refinances a borrowing under another arrangement entered into before commencement; or
- the related asset is acquired under an arrangement entered into before commencement, even if settlement happens after commencement.
Key practical questions can still remain for a particular fund, including whether a contract or loan arrangement was actually entered into before commencement, whether conditions affect that conclusion, and whether a later refinance stays within the carve-out.
Trustees should not treat the commencement window as an invitation to rush a new transaction. An LRBA involves legal documents, a holding trust, finance approval, property due diligence, liquidity analysis and an updated investment strategy. Accelerating those steps can compound risk.
What the announcement means for different SMSF trustees
| Your situation | General information to consider |
|---|---|
| The fund already has a residential LRBA | The arrangement may be carved out if it was entered into before commencement. Continue meeting current obligations and get advice before refinancing or restructuring. |
| A residential purchase or loan is already underway | Check whether the acquisition or borrowing arrangement was entered into before 10 August 2026 and keep the contract, loan, holding trust and advice records together. |
| A future residential LRBA was part of the fund’s plan | The option generally closes from 10 August 2026 unless a transition carve-out applies. Revisit the fund’s strategy, liquidity and diversification rather than assuming the transaction should be accelerated. |
| The fund owns residential property without borrowing | The borrowing change does not directly affect ownership. Existing property and compliance rules continue. |
| The fund has or is considering a business real property LRBA | Business real property remains the key real-property pathway, subject to strict LRBA, related party and arm’s length compliance. |
| An SMSF was being established mainly to borrow for residential property | Reassess the basis for establishment before incurring further costs. The SMSF Setup Guide covers the broader suitability and trustee obligation questions. |
For many trustees, the change will not affect day-to-day fund administration. The most immediate uncertainty falls on transactions already underway and existing borrowers considering a refinance or restructure.
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Frequently Asked Questions
Can my SMSF still buy a house as an investment?
An SMSF with enough available money can still buy residential investment property outright. The 2026 amendment targets the LRBA borrowing exception for real property rather than ownership itself. Existing sole purpose, related party, investment strategy and other compliance rules continue to apply.
Does the ban affect my existing SMSF property loan?
Existing residential property LRBAs entered into before 10 August 2026 are carved out. Refinancing can also be carved out where it maintains or refinances a borrowing under another arrangement entered into before commencement. Get advice before changing lender, extending a term, increasing borrowings or restructuring documents.
Can an SMSF still borrow to buy commercial property?
A new LRBA for real property will generally require the asset to be business real property. Many commercial business premises can qualify, but not every commercial or mixed-use asset will. Trustees should confirm the business real property status before relying on the LRBA exception.
When will the SMSF residential property borrowing ban start?
Schedule 5 commences on 10 August 2026.
Can I start a new residential property LRBA before the ban begins?
The pre-commencement rules continue until Schedule 5 commences on 10 August 2026, but starting or accelerating an arrangement solely to meet the deadline can create material legal, financing, liquidity and compliance risks. Obtain fund-specific legal and licensed financial advice before acting.
Will the tax treatment of SMSF property change?
The announcement concerns the borrowing mechanism. It does not announce changes to the ordinary tax treatment of complying SMSFs, including the one-third CGT discount for eligible assets held longer than 12 months or exempt current pension income where the relevant requirements are met.
Does the announcement affect my SMSF investment strategy?
Trustees should review the investment strategy when a material legal or practical change affects the fund’s intended investments. A strategy that relies on a future residential property LRBA should be reconsidered in light of the 10 August 2026 commencement and the carve-outs for pre-commencement arrangements.
What happens to a mixed-use property under the new rule?
The Act uses the business real property test. Mixed-use property needs careful legal analysis before an LRBA is entered into because a property does not necessarily qualify just because part of it is used commercially.
Disclaimer
This article provides general information only and does not constitute financial, legal, tax or investment advice. It does not take account of your objectives, financial situation or needs. Consider obtaining advice from an appropriately qualified professional before making decisions about an SMSF, property or borrowing arrangement.
This article was originally published after the 23 June 2026 announcement and updated on 1 July 2026 after the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent. It reflects the Act as registered on 26 June 2026 and the ATO’s general LRBA guidance available at the update date.