SMSF Loans & Business Real Property Rules

What Changed with SMSF Residential Borrowing in August 2026

From 10 August 2026, new limited recourse borrowing arrangements for SMSFs can only be used to acquire business real property, which means residential property is now off the table for new SMSF loans. If you already have an SMSF loan for a residential property or signed up before that date, you're protected under grandfathering provisions.

Consider a builder running a profitable business who set up an SMSF a few years back and used it to buy a commercial warehouse. The fund borrowed $600,000 through a limited recourse borrowing arrangement, held the property in a bare trust, and leased it to an unrelated manufacturing business. Rental income flows to the fund, taxed at 15 percent in accumulation phase. The restriction does not stop SMSFs from owning residential property outright or acquiring it without borrowing, provided the usual rules are met. Those usual rules mean no buying from yourself or a relative, and no member of the fund can live in the property.

The change targets leveraged residential acquisitions only. Whether an arrangement was entered into before the commencement date depends on surrounding circumstances and documentation, not just contract exchange. If you exchanged contracts in July but settlement dragged into September, you need specialist legal advice before assuming you're covered.

How the Business Real Property Definition Actually Works

Business real property means 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. This opens up opportunities for builders who understand what qualifies and what doesn't.

A commercial workshop with office space attached, leased to a plumbing contractor, would typically qualify. A property marketed as commercial but used partly for storage and partly as a caretaker's residence would not. Whether a property satisfies the definition depends on actual use at the time of acquisition and is a question of fact. The ATO's guidance in SMSFR 2009/1 sets out detailed examples, and you should work through those before committing.

Mixed-use properties are where most builders come unstuck. A concession exists for primary production property, where a dwelling occupying no more than 2 hectares does not cause the property to fail the wholly and exclusively test, provided the main use of the whole property is not domestic or private. That concession does not extend to a light industrial shed with a flat tacked on the back. The property either qualifies in full, qualifies in part, or doesn't qualify at all, depending on how it's actually used.

Why Related Party Leasing Needs to Be at Arm's Length

Business real property leased between the fund and a related party is excluded from the in-house asset rules, but the lease must be on arm's length terms at market value. If your SMSF owns a commercial property and leases it to your building company, the rent has to reflect what an unrelated tenant would pay for the same premises in the same condition.

In our experience, builders underestimate how closely the ATO scrutinises related party lease arrangements. A lease at 20 percent below market rent to help cash flow in your trading business will trigger non-arm's length income rules, and the fund's income from that property gets taxed at 45 percent instead of 15 percent. The cost of getting a valuation and formalising a proper lease is minor compared to the tax hit if you get it wrong.

If you're using an SMSF loan to fund the acquisition, the loan terms also need to meet the ATO's safe harbour interest rates published under PCG 2016/5. Those rates are updated annually. A loan from a related party lender at a rate materially below the safe harbour can also produce a non-arm's length income outcome.

The Sole Purpose Test and Why It Matters for Builders

The sole purpose test requires that your SMSF is maintained solely to provide retirement benefits to members or their dependants in the event of death. Every decision the trustee makes has to align with that purpose. Buying a property because it suits your business now, rather than because it's a sound investment for the fund, puts you offside.

A builder who acquires a commercial lot next to their current yard because it might be handy for expansion in five years is not acting in accordance with the sole purpose test. The property has to stack up as an investment in its own right. That means rental yield, capital growth potential, tenant quality, lease terms, and location all matter. If the property would not appeal to an unrelated investor, it probably should not be in your SMSF.

The sole purpose test also prohibits any present-day benefit to you or a related party. You cannot store your tools in the property, park your work vehicles there, or use it for any business purpose connected to you personally. The fund can own it and lease it to an unrelated party, but the moment you derive a personal benefit, you breach the test.

What Happens to Capital Gains Tax in Accumulation Phase

A complying SMSF is taxed at 15 percent on assessable income including net capital gains, and where an 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 cost base, acquisition and selling costs, capital improvements, capital works deductions, capital losses, and the fund's overall tax position.

Consider a fund that bought a commercial property for $500,000, claimed capital works deductions over 10 years, then sold for $750,000. The capital gain is not simply $250,000. The cost base is reduced by the capital works deductions already claimed, and the gain is increased accordingly. If the property was held for more than 12 months, the one-third discount applies to the adjusted gain. Any capital losses from other fund assets can be offset, but only against capital gains, not against rental income.

This is not a set-and-forget tax outcome. Builders who assume a flat 10 percent CGT rate without considering the adjustments can be caught short when the fund's tax bill arrives. Capital losses cannot be claimed against income, so if your fund sold shares at a loss in the same year, those losses can reduce the taxable gain but not the rental income.

Division 296 Tax and What It Means for Large Balances

From 1 July 2026, where a member's total superannuation balance at the end of the financial year exceeds $3 million, an additional 15 percent Division 296 tax applies to earnings above that threshold, and where the balance exceeds $10 million, an additional 10 percent applies above that level. For SMSF purposes, Division 296 fund earnings are an adjusted amount of the fund's taxable income, and a capital gain must be realised through a CGT event to form part of the earnings base.

An unrealised increase in property value does not trigger Division 296 tax by itself. If your SMSF holds a commercial property that has appreciated from $600,000 to $900,000 but you have not sold it, that $300,000 gain does not form part of the Division 296 calculation until a CGT event occurs. Rental income, however, does contribute to the earnings base in the year it is received.

LRBA amounts are disregarded when calculating a member's total superannuation balance for Division 296 tax purposes. If your fund owns a $1 million property with a $400,000 loan against it, your total superannuation balance includes the full $1 million, not the net equity. This is a different treatment from the transfer balance cap, where only the net asset value is counted when starting a pension.

An SMSF may elect to make a CGT adjustment to the cost base of its CGT assets to market value as at 30 June 2026, which recognises accrued value prior to the commencement of Division 296 and applies to all CGT assets held directly by the SMSF at that date. If you held a commercial property worth $800,000 on 30 June 2026 and you made that election, any gain calculated for Division 296 purposes starts from that $800,000 base, not your original purchase price. The election does not affect the cost base for ordinary CGT purposes.

Refinancing an Existing SMSF Loan After the August 2026 Changes

The restriction on new residential LRBAs does not apply to maintaining or refinancing a borrowing under an arrangement entered into before the commencement date. If you have an existing residential SMSF loan and want to refinance to reduce the interest rate, the law allows it, but the ATO has not yet published updated guidance on what constitutes a new arrangement versus a refinancing.

Under the ATO's existing position, a significant change to the terms or conditions of an LRBA ends the arrangement and a new one begins. Circumstances that might end an existing arrangement include refinancing that is inconsistent with the original arrangement, borrowing to acquire an asset not contemplated under the original arrangement, and changes to the ultimate beneficiaries.

If you refinance your existing residential SMSF loan to a different lender on substantially similar terms, that would typically be treated as maintaining the arrangement. If you refinance and also increase the loan amount to fund renovations, that would likely be treated as a new arrangement, and new arrangements involving residential property are now prohibited. Given the ATO has not updated its guidance as at late July 2026, you should seek advice from an SMSF specialist mortgage broker before proceeding with any refinancing that involves material changes.

Commercial SMSF loan refinancing is not affected by the 2026 restriction. You can refinance a commercial property loan to a new lender, adjust the rate from fixed to variable, or restructure the term, provided the refinanced loan relates to the same asset, maintains the limited recourse character, and meets arm's length terms under PCG 2016/5.

How Limited Recourse Borrowing Arrangements Protect the Rest of Your Fund

In the event of a default, recourse of the lender against the SMSF trustees must be limited to the asset being acquired under the arrangement. The property is held in a separate bare trust. If the loan defaults, the lender can only claim against that property. Your other SMSF assets, including shares, cash, and any other properties held outside the LRBA, are protected.

This limited recourse structure is not optional. It is a legislated condition for the borrowing to be permitted under the SIS Act. A related party can provide a personal guarantee to the lender, but their recourse must also be limited to the asset under the arrangement, not to other SMSF assets. If you personally guarantee the loan and the property is sold at a loss, the lender can pursue you personally for the shortfall, but they cannot touch the other assets in the fund.

Builders often ask whether they can use an offset account linked to an SMSF loan. Genuine offset accounts offered by an authorised deposit-taking institution are not treated as a borrowing or a charge over fund assets under existing ATO guidance. The offset balance has to be fund money, not personal money, and it has to be held in the name of the SMSF trustee. You cannot link your personal offset account to the SMSF loan and expect it to reduce the interest without creating a related party benefit issue.

Call one of our team or book an appointment at a time that works for you. We work with builders who need plain-English advice on self-employed loans, SMSF property acquisitions, and structuring arrangements that meet both the tax rules and your retirement goals.

Frequently Asked Questions