SMSF property lending changed fundamentally in August 2026. A new limited recourse borrowing arrangement over a residential investment property is no longer available, and that is not a tightening of policy. It is law.
New residential LRBAs ended on 10 August 2026. What business real property means in practice, what is grandfathered, and why the bare trust must exist before exchange.
Trustees who set up a fund expecting to borrow for a residential investment need a different plan. Trustees who already hold one are largely unaffected, which is the distinction that matters most.
This guide sets out exactly what changed, what business real property means in practice, what is grandfathered, and the order in which an SMSF purchase has to be established if it is to be valid.
From 10 August 2026, an SMSF can only use a limited recourse borrowing arrangement to acquire real property if that property is business real property. The change was made by the Treasury Laws Amendment (Tax Reform No. 1) Act 2026.
The identity of the lender makes no difference. Bank, non-bank or a related party loan from a member are all treated the same way, so the common workaround of lending to your own fund does not avoid the rule.
| Scenario | Permitted under a new LRBA |
|---|---|
| Residential investment property | No |
| Commercial premises used in a business | Yes, if it meets the business real property test |
| Your own business premises | Yes, and this is the most common case |
| Vacant land held for investment | Generally no |
| Primary production land with a dwelling | Possibly, assessed on the facts |
| Related party lending for residential | No, the lender identity is irrelevant |
The ATO sets out its position in its published guidance on changes to limited recourse borrowing arrangements. Trustees should read it alongside advice specific to their fund.
Business real property means land and buildings used wholly and exclusively in one or more businesses. Each word in that phrase does work, and the two that catch people are wholly and exclusively.
A warehouse your company trades from qualifies. A duplex where one side is let residentially does not, because it is not exclusively business use. A property with a shop downstairs and a flat upstairs fails the test unless the residential portion is genuinely incidental.
Get this classified before you make an offer. A property that fails the test after exchange leaves the fund committed to a purchase it cannot borrow for.
The change is not retrospective, and this is the part most trustees are relieved to hear.
One related point worth knowing. The negative gearing changes in the same Act exclude superannuation funds, including SMSFs, so a fund holding a grandfathered residential property is not caught by those provisions either.
Background sits in limited recourse borrowing arrangements explained and whether an SMSF can borrow to buy property.
Sequence is not administrative detail here. Doing these in the wrong order can invalidate the arrangement, and the most common failure is exchanging before the holding trust exists.
Establish that it meets the business real property test before anything else. This is a question for your accountant or SMSF adviser, not for the selling agent.
Lenders look at the deposit, the contribution history and a liquidity buffer left in the fund after settlement. A fund that settles with nothing left over will not be approved.
The fund’s written investment strategy must contemplate the acquisition, including liquidity and diversification. Update it before you proceed, not afterwards.
Most SMSF lenders require a corporate trustee for the fund. If yours has individual trustees, changing structure takes time and should start early.
The bare trust setup sequence is where arrangements fail. The holding trust and its trustee company must exist, with the deed executed, before contracts are exchanged. A bare trust created afterwards generally cannot be fixed.
Approval in principle is not approval. The lender will want the deeds, the fund’s financials and the contribution history before issuing a formal offer.
The contract is entered into by the bare trustee, not the fund and not the members personally. Getting the purchaser name wrong at exchange is expensive to correct and sometimes impossible.
If the fund is leasing the premises back to a member’s business, a written lease at market rent on commercial terms must be in place. Informal arrangements between related parties attract attention at audit.
Illustrative only, included to show how the components fit together. Not a client file and not a quote. Lending parameters vary considerably between SMSF lenders.
| Element | Detail |
|---|---|
| Property | Industrial unit in a western Sydney business park |
| Use | Occupied by the members’ own trading company |
| Business real property test | Met, wholly and exclusively business use |
| Purchase price | $900,000 |
| Fund contribution | $315,000, being 35 per cent |
| Borrowing | $585,000 under an LRBA |
| Liquidity retained in the fund | Buffer held after settlement, as required by the lender |
| Lease | Written lease to the trading company at market rent |
| Structure | Corporate trustee for the fund, separate trustee company for the bare trust |
The deposit requirement is the part that surprises trustees. SMSF lending has never been a high loan-to-value product, and with fewer lenders in the market since August 2026 the terms have not become more generous.
The arrangements that go wrong are almost never about the property. They are about sequence. Somebody exchanged before the bare trust existed, and by the time anyone notices it is too late to fix cleanly.
Paritosh Wadhwani, Director and Principal Broker, APW Finance
Not under a new limited recourse borrowing arrangement entered into on or after 10 August 2026. From that date an LRBA over real property is only available where the property is business real property. An SMSF can still purchase residential property outright using the fund’s own money, since the restriction applies to borrowing rather than to ownership.
Land and buildings used wholly and exclusively in one or more businesses. Your own business premises is the most common example, and property leased to an unrelated business can also qualify. Actual use determines it rather than zoning, so a mixed residential and commercial property generally fails unless the residential part is genuinely incidental.
No. Arrangements entered into before 10 August 2026 are grandfathered, the property does not have to be unwound, and it does not need to become business real property. Refinancing an existing arrangement is also permitted. Take advice before materially varying the loan, particularly if the terms change or the borrowed amount increases.
Under an LRBA the property is held by a separate holding trust while the loan is on foot, and the contract must be entered into by that trustee. If the bare trust does not exist at exchange, the purchaser on the contract is wrong and the arrangement may not satisfy the legislative requirements. Correcting it afterwards is difficult and can trigger duty a second time.
Substantially more than a standard home loan. SMSF lending has always been a lower loan-to-value product, and lenders also require a liquidity buffer to remain in the fund after settlement so the loan can be serviced if rent is interrupted. Exact requirements vary between lenders and have not loosened since the 2026 changes reduced the number of participants.
Yes, and this is one of the few situations where an SMSF may deal with a related party in property. The lease must be in writing, at genuine market rent, and on ordinary commercial terms including arrears being enforced. Informal or discounted arrangements between a fund and a member’s business are a common audit finding.
SMSF property lending is now a business premises product. For trustees buying the building their own business occupies, the structure still works well. For residential investment, new borrowing is closed.
If you hold a pre-August 2026 arrangement, you are grandfathered. If you are planning a new purchase, classify the property before you make an offer.
Read more about SMSF lending or commercial property finance. You can also read SMSF deposit requirements or how commercial rates are calculated.
Talk to us before you exchange.
Paritosh Wadhwani | Director and Principal Broker, APW Finance
Member of the Finance Brokers Association of Australia (FBAA). Arranging residential, commercial and specialist lending for Sydney clients across a panel of more than 50 lenders.
APW Finance Pty Ltd, 304/20a Lexington Drive, Bella Vista NSW 2153. Email: info@apwfinance.com. Phone: +61 447 959 546.
ACN 620 646 479 | ABN 79 620 646 479
This guide is general information only. It does not take into account your objectives, financial situation or needs, and it is not financial or credit advice. Lending criteria, interest rates, duty thresholds and government schemes change, and every application is subject to lender approval. Consider whether this information suits your circumstances and seek independent advice before acting. Figures quoted are current at the date below and should be confirmed before you rely on them. Last reviewed: October 2026.
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