SMSF Borrowing After 10 August 2026: How LRBAs Work Now

LRBAs are not banned, but new property loans must be for business real property

A limited recourse borrowing arrangement (LRBA) is still open to a self-managed super fund (SMSF), but the property it can buy has narrowed. According to the Australian Taxation Office (ATO), an LRBA entered into on or after 10 August 2026 to purchase real property can only be used to acquire business real property. The limit applies whether the lender is a bank, a non-bank lender or a related party.

The change is enacted law, not a proposal. Schedule 5 of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 added the business real property condition to section 67A of the Superannuation Industry (Supervision) Act 1993. The Act was assented to on 26 June 2026, and Schedule 5 started on the 45th day after that, 10 August 2026.

The ATO says there are no other changes to how LRBAs operate, or to the exceptions to the general prohibition on SMSF borrowing.

The ATO has also issued draft updates to its two main rulings in this area, SMSFR 2009/1 on business real property and SMSFR 2012/1 on LRBAs, with comments open until 27 November 2026, so the ruling references in this guide reflect the published versions and may change.

This guide is general information only. It does not say whether borrowing through super, or running an SMSF at all, suits any reader.

An LRBA is a loan, a holding trust and one asset

An LRBA is one of the few ways an SMSF can borrow, because super funds generally cannot borrow in their own right. The ATO describes the arrangement in four parts:

1. The SMSF trustee obtains a loan and uses the loan to buy an asset.
2. The asset sits in a separate trust, known as the holding trust.
3. The SMSF acquires a beneficial interest in the asset and, after repaying the loan, has the right to legal ownership.
4. The other assets of the SMSF are protected if the loan defaults.

Investment returns from the asset go to the SMSF, even though the holding trust holds the asset.

Super law does not specify the type of holding trust, but the trust must give the SMSF trustee both the beneficial interest and the right to acquire legal ownership. The ATO says complex structures are unlikely to meet that requirement. A discretionary trust could not be used, and neither could a unit trust in which the SMSF trustee is one of a number of unit holders.

Who the 10 August 2026 limit catches depends on two dates

The limit turns on when the LRBA was entered into and when the binding contract to buy the property was exchanged. The table sets out the ATO's position for real property.

Two details decide the borderline cases. The ATO considers refinancing to mean a new loan contract for the same asset, with the same or a new lender, so a loan for a different asset is outside that meaning. A pre-10 August contract can also lose its protection if the contract is changed so significantly that its fundamental terms no longer exist, because a new arrangement may then have begun.

Business real property is tested at the start and throughout the loan

Business real property generally means land and buildings used wholly and exclusively in a business, according to the ATO. A new LRBA over real property has two tests: the property must meet the definition when the LRBA is entered into, and the property must keep meeting the definition for the entire life of the LRBA.

There is a special rule for primary production. A property with a private dwelling can still qualify if the dwelling is on an area of no more than 2 hectares and the main use of the whole property is not domestic or private.

Where business or occupancy approvals delay use, the ATO says the SMSF needs to show the business has commenced when the LRBA is entered into, and that the property will be used in that business.

The guide to SMSF business real property applies the definition to premises in more detail.

Losing business use during the loan is a borrowing breach

If a property stops being business real property during a new LRBA, the SMSF has breached the law against borrowing and compliance action may apply, according to the ATO. Returning the property to business use helps only from that point. The SMSF will not be in breach from the time of the later business use, but the original breach is not removed and regulatory consequences still apply for the period of breach.

A gap between tenants is treated differently. For commercial premises on lease, the ATO says the property does not stop being business real property only because the owner is looking for a new tenant. If the owner abandons plans to lease the property, the property no longer qualifies.

Whether a particular gap between tenants affects a property depends on the facts, and the ATO offers SMSF-specific advice on how super law applies to a fund's circumstances.

Residential property outside the definition can be held, but not bought with a new LRBA

An SMSF can still invest in residential property that is not business real property, provided the investment meets all other regulatory rules, but the ATO says a new LRBA cannot finance that purchase.

Residential property is not automatically excluded. If residential property meets the definition of business real property, the ATO says the property can be acquired and financed under an LRBA, provided the definition is met at the start and throughout the life of the arrangement.

Ordinary residential rentals may not meet the definition. The ATO's business real property ruling, SMSFR 2009/1, says the letting activities must have a business character, and that leasing residential property can often involve investment activities carried out other than by way of business. Outside a property investment business that lets others use the property, the ruling says residential property is not business real property. The ruling deals separately with short-term accommodation.

One asset, and borrowed money can repair it but not improve it

An LRBA can fund only a single asset, or a collection of identical assets that have the same market value and can be treated as a single asset. According to the ATO, multiple real property titles generally cannot be acquired under a single LRBA, even if the properties are substantially the same. An exception may be possible where it is reasonable to conclude that what is being acquired is distinctly identifiable as a single asset, and SMSFR 2012/1 gives the example of a factory built across three titles.

Borrowed money can also pay expenses from the borrowing or acquisition, such as loan establishment costs or stamp duty, and costs of maintaining or repairing the asset. Borrowed money cannot be used to improve the asset.

The ATO's ruling SMSFR 2012/1 draws the line. A repair restores the function of an asset without changing its character. An asset is improved when its state or function is significantly altered for the better, through substantial alterations or further substantial features. In one of the ruling's examples, restoring a fire-damaged kitchen with modern equivalent materials is a repair, while extending the house to enlarge the kitchen is an improvement.

An SMSF also cannot put an existing fund asset into an LRBA, and the asset under an LRBA cannot carry a charge other than one relating to the borrowing.

A related-party loan must look like an arm's length loan

An SMSF can borrow from a related party, but the ATO says the terms and ongoing operation of the loan must be consistent with what a lender who is not a related party would offer. The lender must not charge more than an arm's length rate of interest, and the trustee must be able to demonstrate that.

The ATO points to reasonably objective and supportable data for working out that rate, such as the Reserve Bank's Indicator Lending Rates for a similar borrowing. Paying a member or a member's relative an excessive rate also contravenes the ban on giving them financial assistance from fund resources.

Paperwork matters as well. The ATO says trustees must keep appropriate documentation, such as a written loan agreement, to show a genuine borrowing. Without that documentation, money from a related party might be treated as a contribution to the SMSF, which could have significant tax consequences if a contributions cap is exceeded.

Tax is the other risk. Under Practical Compliance Guideline PCG 2016/5, income from the asset may be non-arm's length income if the LRBA's terms are not consistent with an arm's length dealing.

The safe harbour for real property: 70%, 15 years, monthly repayments

PCG 2016/5 sets out safe harbour terms, which the ATO accepts as consistent with an arm's length dealing. A loan outside these terms is not automatically non-arm's length, but the trustee gets no certainty from the guideline and needs to demonstrate arm's length terms some other way.

A worked illustration, using made-up figures, shows the scale. On premises valued at $600,000 when the loan is entered into, 70% allows a loan of up to $420,000. At the 2026-27 rate of 9.35% over 15 years, a monthly principal and interest repayment comes to about $4,348. A variable loan uses the applicable rate for each year, so the repayment would change as the rate changes. These are safe harbour terms, not a statement of what any lender offers.

An LRBA deficiency is a shortfall the lender cannot recover from the fund

In this guide, an LRBA deficiency means the asset sells for less than the loan balance. The ATO's guidance calls this a shortfall. The rights of the lender against the SMSF trustee are limited to rights relating to the asset, so the other assets of the SMSF are protected.

Take made-up figures: a $380,000 loan balance and premises sold for $340,000 after a default. The shortfall is $40,000. The SMSF loses the asset, but the lender cannot pursue the other assets of the SMSF for the $40,000.

A related party can give a personal guarantee, but any right of the guarantor to be indemnified by the trustee is limited to rights relating to the asset. A guarantor's payment is a contribution to the SMSF if the payment satisfies a liability of the SMSF and the guarantor forgoes, or cannot enforce, a right of indemnity against the SMSF. The ATO says there is no contribution if the trustee has exercised a right to walk away from the arrangement and has no further liability or right to the asset, and the lender still calls on the guarantee for a shortfall after the asset is disposed of.

When an LRBA is paid off, the fund can take legal ownership

Once the LRBA is repaid, the SMSF can acquire legal ownership of the asset from the holding trust without breaching super laws, according to the ATO, even though the holding trust is a related trust.

Leaving the asset in the holding trust after repayment does not of itself create an in-house asset. Under a 2014 ATO determination, the fund's investment in the holding trust is not an in-house asset where the in-house asset exception for a holding trust applied from when the trust began to hold the asset until the borrowing was repaid, and would still apply at the time of testing apart from the repayment.

Any lease to a related party also needs checking. The ATO says an SMSF's interest in a holding trust is an in-house asset when the property is leased to a related party, unless the leased asset would not be an in-house asset if owned directly, such as business real property.

A related-party LRBA can add to a member's total super balance

An LRBA can affect a member's total superannuation balance, which the ATO describes as the total value of all their interests in all super funds. For an LRBA entered into from 1 July 2018, a member's share of the outstanding balance can be included where the lender is a related party or an associate of the SMSF, or where the member has met a condition of release with no cashing restriction. Those conditions include retirement, terminal medical condition, permanent incapacity and being 65.

An LRBA entered into before 1 July 2018 and refinanced from that date is also caught, unless the new borrowing is secured by the same asset and the refinanced amount is the same or less.

The member's share is a proportion of the outstanding balance at 30 June. In the ATO's example, the outstanding balance is $200,000 and $800,000 of the fund is supported by the assets securing the LRBA. With $300,000 of a member's interests supported in the same way, $75,000 is added to that member's balance. The SMSF reports that amount in the member's section of the annual return.

Where general information stops

Whether an LRBA suits a particular fund is a decision for that fund's trustees, with advice. The ATO recommends seeking advice from a qualified, licensed professional before entering an LRBA, and not deciding until the trustee understands how the investment works. Its list of points to weigh includes who the lender will be, whether the loan can be called in early, what happens if rates change, fees and costs, and insurance and maintenance costs.

Two points help in choosing who to ask:

• Financial product advice: the Australian Securities and Investments Commission (ASIC) notes that accountants, auditors and legal professionals may be limited in their ability to provide this advice about SMSFs.
• Tax: a registered tax agent can help with how tax law applies to the fund's returns and other tax documents.

The ATO also offers SMSF-specific advice on how super law applies to a fund's circumstances.

Lomandra Accounting is registered with the Tax Practitioners Board and lists "property in super guidance with loan compliance checks and trustee education" among its services. To ask about an existing arrangement's records and compliance, contact Lomandra Accounting or read about accounting on the Sunshine Coast.