SMSF borrowing for residential property: what the new rules mean for you

Key points

• SMSFs can no longer establish new borrowing arrangements to acquire residential property, marking a significant change to property investment strategies.
• Existing residential property borrowing arrangements are generally protected under grandfathering provisions, providing certainty for affected trustees.
• Despite the changes, SMSFs can still access property investments through alternative structures, including outright ownership and diversified investment vehicles.

SMSF borrowing ban is now law

From 10 August 2026, self-managed super funds (SMSFs) can no longer enter into a new Limited Recourse Borrowing Arrangement (LRBA) to purchase residential property. This follows Royal Assent of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 on 26 June 2026, with the ban commencing 45 days later.

The change was introduced as part of a broader Federal tax reform package, and its inclusion was a condition of the Greens’ support in securing passage of that package through the Senate. It was also in response to regulator concerns who had previously highlighted the potential risks associated with leverage in SMSFs, particularly where borrowing is used to invest in residential property.

An LRBA is the legal structure that has, since 2007, allowed an SMSF to borrow money to acquire a single asset, with the lender’s recourse limited to that asset. If the loan defaulted, the fund’s other assets were protected. This is the mechanism that made it possible for members to use their SMSF to gear into residential investment property.

What this doesn’t affect

It’s important to be clear about the scope of the change, so you can plan with confidence.

• Existing LRBAs are fully grandfathered. If your SMSF already holds residential property under an LRBA established before 10 August 2026, nothing changes. Repayments continue as normal, the fund retains the concessional tax treatment on rental income, and existing capital gains tax concessions remain available.
• Refinancing existing residential LRBAs remains permitted, provided the refinance maintains the existing borrowing rather than establishing a new acquisition.
• Contracts exchanged before 10 August 2026 are protected, even if settlement occurs after that date. The trigger point is the contract date, not settlement, so a fund that is genuinely mid-transaction is not caught out.
• Business real property is unaffected. SMSFs can continue to use LRBAs to acquire eligible commercial or business real property (broadly, property used wholly and exclusively in carrying on a business), subject to the existing superannuation rules.
• The broader tax treatment of super is unchanged. Investment earnings in a SMSF will continue to be taxed concessionally at 15% in accumulation phase, and 0% on income supporting a pension for members over 60. This measure sits separately from the CGT and negative gearing changes affecting property held outside super.

If you are already in the process of establishing a residential LRBA, timing matters. To qualify under the current rules, you’ll need an established and registered SMSF, a properly documented bare trust, and a signed contract before the commencement date. In many cases, lender approval timeframes may be the biggest hurdle.

How SMSFs can still acquire property

Borrowing is only one of several ways a fund can hold property. For most trustees, the investment appeal of property within super remains unchanged. The key difference is the financing options available for new residential acquisitions. The main alternatives are:

1. Outright (cash) purchase. The most straightforward path. If the fund has sufficient liquidity, it can purchase residential or commercial property directly, with no borrowing involved and no LRBA required. This may involve building the fund balance over time through additional contributions (within contribution caps) or consolidating other assets before purchase.
2. LRBA for business real property. Borrowing through an LRBA remains fully available for commercial and business real property. This can be a powerful strategy for business owners, allowing the fund to purchase business premises, including a property used by their own business, while building retirement wealth over time. Given the strict application of the business real property rules, even an incidental residential component may jeopardise the property’s eligibility and should be carefully assessed before proceeding.
3. In-specie transfer of business real property. Members can transfer eligible business real property they personally own into the fund as a contribution, subject to contribution cap limits and market valuation requirements. This route is not available for residential property, which generally cannot be acquired from a related party under the In-House Asset rules.
   
4. Investment in unlisted unit trusts holding property. A unit trust can give an SMSF exposure to residential property without direct ownership. This may be for example, a non-geared related unit trust, meeting certain criteria or via an unrelated unit trust. This allow pooled capital and diversify, however it’s important to ensure the structure is set up correctly and complies with relevant superannuation requirements before investing.
5. Listed and managed property investments. Direct exposure isn’t the only way to have property in an SMSF’s portfolio. Listed property trusts (REITs), property-focused managed funds, and ETFs offer property market exposure  without the responsibilities of direct ownership or the constraints of SMSF property rules that apply to direct acquisitions.
6. Pooling members’ balances. Where a fund has multiple members, combining balances (through rollovers or contributions) may bring an outright residential purchase within reach where it previously depended on borrowing.

Our view

Every fund’s position is different, and the right path depends on the fund’s cash position, member balances, contribution capacity, and overall investment strategy. Depending on the scenario, the following actions might be required:

• Already hold a residential property LRBA? No action is required, but it’s a good time to confirm your loan documentation and repayment structure remain compliant.
• Currently buying a residential property through your SMSF? The contract exchange date is likely to be critical and lender timeframes may become increasingly challenging.
• Planning a geared residential purchase inside your SMSF? We’d recommend a conversation about which of the alternative strategies above best fits your retirement goals with a licensed financial planner.

Please contact our firm to discuss how these changes affect your fund’s investment strategy or overall superannuation goals.

This article is general information only and does not constitute personal financial, taxation, or legal advice. It does not take into account your individual objectives, financial situation, or needs. Please speak with us before making any decision regarding your SMSF.