Can Your SMSF Still Borrow to Buy Property? The 2026 LRBA Changes Explained

The rules governing limited recourse borrowing arrangements (LRBAs) for real property in SMSFs changed on 10 August 2026. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026, passed with the support of the Australian Greens and receiving Royal Assent on 26 June 2026, introduced a new requirement: from 10 August 2026, an SMSF can only use a new LRBA to acquire real property if that property qualifies as business real property under section 66 of the Superannuation Industry (Supervision) Act 1993 (SIS Act).

While the change is widely described as a "residential property ban," the legal test is more precise than that framing suggests. Eligibility depends on how the property is used, not what type of property it is. For SMSF trustees considering property acquisition through borrowing, this distinction matters.

What Is a Limited Recourse Borrowing Arrangement (LRBA)?

An LRBA is a specific type of borrowing arrangement permitted under the Superannuation Industry (Supervision) Act 1993 that allows an SMSF to take out a loan to purchase a single asset. The asset is held in a separate holding trust during the loan period. The lender's recourse in the event of default is limited to the asset being purchased - it cannot pursue other fund assets, which is why these arrangements are called "limited recourse."

LRBAs have been a popular strategy for SMSF trustees wanting to purchase property using a combination of fund assets and borrowed funds, without needing the full purchase price sitting in the fund at the time of acquisition.

The New Business Real Property Requirement

From 10 August 2026, new LRBAs for real property are only permitted where the property qualifies as business real property under the SIS Act. Business real property is broadly defined as an interest in real property where the land is used wholly and exclusively in one or more businesses. The key word is "use" — the test is not based on how a property is classified, zoned, or described.

This means some properties commonly regarded as residential may still be eligible, while some properties commonly regarded as commercial may not be. An SMSF can still acquire residential property using existing fund assets without borrowing, provided the investment meets all other applicable requirements including the sole purpose test and the fund's investment strategy. The restriction applies to borrowing, not to property ownership itself.

Commencement confirmed: The new business real property requirement takes effect on 10 August 2026. SMSFs that entered into a binding contract to acquire real property through an LRBA before this date are protected by the grandfathering provisions, even if settlement occurs after 10 August 2026. The key test is the date of the binding contract, not the settlement date.

What Is Grandfathered?

Existing LRBAs entered into before 10 August 2026 are fully protected, regardless of property type. If your SMSF already holds property through an LRBA, you are not required to sell or repay the loan ahead of schedule. The new requirements apply only to new arrangements entered into on or after the commencement date.

Importantly, the grandfathering provisions also protect transactions where contracts were exchanged before 10 August 2026, even if settlement has not yet occurred. The key test is whether a binding contract was in place before the commencement date, not whether the property has settled. Additionally, the refinancing of an existing pre-10 August 2026 LRBA after that date does not trigger the new business real property requirements.

Already under contract? If your SMSF exchanged a binding contract to acquire real property through an LRBA before 10 August 2026, your arrangement is grandfathered — even if settlement occurs after that date. The property does not need to satisfy the business real property requirements. Keep your contract documentation and confirm the position with your SMSF adviser.

What the Business Real Property Test Means in Practice

Business real property is defined in section 66 of the SIS Act and the ATO's interpretation is set out in SMSFR 2009/1. The operative requirement is that the land must be used wholly and exclusively in one or more businesses. Critically, it does not matter whether that business is operated by the SMSF, a fund member, or an entirely unrelated party — the test is about what the property is actually used for, not who uses it.

Because the test turns on use rather than classification, there are counterintuitive outcomes at both ends. The following examples illustrate how the test applies.

Example 1 — Commercial warehouse leased to a business (qualifies). An SMSF acquires a warehouse that is leased wholly to a manufacturing business. The property is used entirely in a business. It qualifies as business real property, and an SMSF can use a new LRBA to acquire it after 10 August 2026. If the tenant is a business run by a fund member, the lease-back is also permitted under the related-party rules, subject to it being on arm's length commercial terms.

Example 2 — Residential investment property leased to a tenant (does not qualify). An SMSF acquires a house leased to tenants for residential purposes. Even if one of the tenants operates a small business from the property, the property is not being used wholly and exclusively in a business. It does not qualify as business real property, and a new LRBA cannot be used to acquire it after 10 August 2026. This also applies to residential land zoned for future development and apartments used for standard rental.

Mixed-use or partially business-used properties require careful analysis. A property that is partly used for residential purposes and partly for business will generally fail the wholly-and-exclusively requirement, even where a significant portion of the space is used in a business. Trustees should obtain specific advice before assuming a property qualifies.

Industry Reaction

SMSF Association CEO Peter Burgess used a Parliament House roundtable discussion on 1 July 2026, hosted by Shadow Minister for Housing and Homelessness Andrew Bragg, to raise detailed concerns about both the policy rationale and technical design of the legislation.

On the potential impact on housing supply, Mr Burgess said: "There is a strong argument that a targeted LRBA carve-out for new residential premises would align with the Government's stated rationale for exempting new builds from the broader negative gearing and CGT changes. Reducing this source of demand risks slowing housing supply at a time when Australia needs more homes, not fewer."

On the technical drafting of the legislation: "This is not a clean residential property ban. The legislation makes future SMSF real property borrowing turn on the business real property definition in the SIS Act, a complex technical test never designed to operate as the gateway for all SMSF property borrowing. The result is a series of unintended consequences: some residential property may remain eligible, while some commercial, rural and small-business premises may be excluded. This is not sound housing policy; it is rushed law creating uncertainty for trustees, advisers, lenders and small businesses."

On risks for grandfathered trustees seeking to settle after the ban: "We are concerned the changes to the LRBA rules will make the remaining residential SMSF lending market even thinner, increasing settlement and refinance risk for grandfathered trustees as lenders may look to exit the residential LRBA market. A trustee who signs a valid off-the-plan contract before 10 August 2026 may settle 12–24 months later and still need an SMSF residential LRBA product at settlement. If lenders withdraw products or approvals lapse, the transitional protection is of little practical use."

Practical Implications for Trustees

For most existing SMSF trustees, the day-to-day management of their fund will be unaffected - existing residential LRBAs continue as normal. However, trustees who had been planning new residential property acquisitions through borrowing need to act quickly and consider the following:

If you are planning a new property acquisition through borrowing: The property must qualify as business real property. Seek specific legal and SMSF advice before proceeding, as the test depends on how the property will actually be used.
If contracts are already exchanged: You are likely protected. Keep detailed records of the contract date and confirm with your SMSF administrator.
If you hold an existing residential LRBA: No action required. Your arrangement is fully grandfathered.
If you were considering commercial property: SMSF borrowing for business real property remains available and unaffected. This may now be a more actively considered alternative.
If you were planning to purchase without borrowing: Direct purchase of residential property (without an LRBA) remains permitted, provided the fund has sufficient assets and the investment meets the sole purpose test and investment strategy requirements.

Speak to an SMSF Specialist About Your Options

The 2026 LRBA changes affect any SMSF trustee considering property acquisition through borrowing. At Altitude SMSF Accounting, we are helping clients understand what the business real property test means for their specific situation — whether that is reviewing an existing LRBA, assessing whether a property qualifies, or considering alternatives. Contact us today to discuss your fund.