SMSF Borrowing Rules Changed on 10 August 2026: Why Business Real Property Is Now the Key Requirement

From 10 August 2026, self-managed superannuation funds (SMSFs) can no longer use a limited recourse borrowing arrangement (LRBA) to acquire real property unless the property qualifies as business real property (BRP).

This change was introduced by the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which received Royal Assent on 26 June 2026 and commenced 45 days later.

The amendments have frequently been described as a ban on SMSFs borrowing to acquire residential property. While that description captures the broad practical effect of the reform, it does not reflect the precise legal position. The legislation does not focus on whether a property is residential or commercial. Instead, the determining factor is whether the property satisfies the definition of business real property under the superannuation laws.

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Background

Superannuation funds are generally prohibited from borrowing. Since 2007, however, a limited exception has allowed borrowing under an LRBA, provided the lender's recourse is limited to the acquired asset and the asset is held through an approved holding trust structure.

Over the years, LRBAs have commonly been used for two purposes:

purchasing investment property within superannuation using leveraged finance; and

acquiring business premises that are subsequently leased to a member's business on commercial terms.

The new legislation changes the circumstances in which an SMSF can utilise an LRBA to acquire real property.

What Has Changed?

The Australian Taxation Office (ATO) has confirmed that, for arrangements entered into on or after 10 August 2026, the definition of an acquirable asset has been amended so that certain real property can no longer be purchased under a new LRBA.

For real property acquisitions, the key consideration is now whether the property qualifies

as business real property.

Several important points should be noted:

1. The test is based on business use, not property classification

A property is not automatically eligible simply because it is commercially zoned, nor

automatically ineligible because it is residential in nature.

A residential property that satisfies the definition of business real property may still be

acquired under an LRBA. Conversely, a commercial property that does not satisfy that

definition cannot.

2. The restriction applies regardless of the lender

The new rules apply irrespective of whether the borrowing is obtained from:

• a bank;

• a non-bank lender;

• a related party lender.

3. The changes are limited to real property acquisitions

The amendments specifically address real property acquired through an LRBA. Other

assets that may be acquired under existing LRBA provisions are not affected by these

changes.

What Has Not Changed?

The reforms operate prospectively and include several important transitional protections.

Existing LRBAs remain unaffected

An LRBA entered into before 10 August 2026 continues under the previous rules. Trustees

are not required to restructure the arrangement or dispose of the underlying property.

Refinancing remains available

The refinancing or maintenance of a pre-existing LRBA after 10 August 2026 does not

trigger the new rules. The property does not need to satisfy the business real property

requirements merely because the existing borrowing has been refinanced.

Exchanged contracts receive grandfathering protection

Where a legally binding contract to acquire the property was exchanged before 10 August

2026, the previous rules continue to apply even if settlement or funding occurs after that

date.

Residential property can still be acquired without borrowing

The changes do not prevent SMSFs from acquiring residential property using available fund

assets.

What has been removed is the ability to borrow under a new LRBA to acquire residential

property that does not qualify as business real property.

What Does "Business Real Property" Mean?

Business real property is defined in section 66 of the Superannuation Industry (Supervision)

Act 1993.

Broadly, it requires an eligible interest in real property where the land is used wholly and

exclusively in one or more businesses. The ATO's interpretation is set out in SMSFR

2009/1.

Two aspects of the definition are commonly misunderstood.

First, the business operating from the premises does not need to be carried on by the SMSF

or a related party. Property leased to an unrelated business may still qualify as business

real property.

Second, the requirement that the property be used wholly and exclusively in a business is

a strict test. Mixed-use arrangements, partially residential properties, or property that is

only partly used for business purposes may fail the definition, even where the property is

commercially described or commercially zoned.

Ultimately, eligibility is determined by the property's actual use rather than the label

attached to it.

As a result, some properties commonly regarded as "commercial" may not qualify, while

certain properties commonly regarded as "residential" may still satisfy the requirements.

Disclaimer

This article reflects publicly available information regarding the exposure of draft legislation as at the date of publication and is general in nature. It does not constitute tax, financial, or legal advice and should not be relied upon without obtaining professional advice tailored to your specific circumstances. To discuss how these proposed changes may affect you or your business, please contact our advisory team at Wis Australia.

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