The ban on new limited recourse borrowing arrangements (LRBAs) for residential property in SMSFs is now law. The legislation, part of the Government's Tax Reform (No. 1) Bill 2026 and passed with the support of the Australian Greens, received Royal Assent on 26 June 2026. The ban comes into effect on 10 August 2026, being 45 days after Royal Assent.
For SMSF trustees who use or have been considering using borrowing to purchase residential property, this article sets out exactly what the ban means, what is protected, and what options remain.
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.
What Exactly Is Being Banned?
From 10 August 2026, SMSFs are prohibited from entering into any new LRBA where the asset being acquired is residential property. This covers residential houses, apartments, units, and land zoned for residential use.
It is worth noting that the ban applies specifically to the use of borrowed funds. An SMSF can still purchase residential property outright using existing fund assets, provided the investment meets all other applicable requirements including the sole purpose test and the fund's investment strategy. The restriction is on borrowing to acquire residential property, not on residential property ownership itself.
Commencement confirmed: The ban takes effect on 10 August 2026. SMSFs that entered into a binding contract to acquire residential 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 contract, not the settlement date.
What Is Grandfathered?
Existing LRBAs on residential property are fully protected. If your SMSF already holds residential property through an LRBA, you are not required to sell the property or repay the loan ahead of schedule. The ban applies only to new arrangements entered into after the commencement date.
Importantly, the grandfathering provisions also protect transactions where contracts have been exchanged before the ban's commencement date, 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.
Already under contract? If your SMSF has already exchanged contracts to purchase residential property through an LRBA, your arrangement is protected by the grandfathering provisions - even if settlement occurs after the ban takes effect. Make sure your documentation is in order and retain evidence of the contract date.
What Property Types Are Still Permitted?
The ban specifically targets residential property. SMSF borrowing to acquire commercial property - formally known as "business real property" under s.66 of the SIS Act - remains fully available.
Business real property broadly covers property used wholly and exclusively in one or more businesses. This includes commercial offices, warehouses, factory premises, retail spaces, and similar. It is one of the few asset classes that can be leased back to a related party (such as a business run by a fund member) under the existing related-party rules.
| Property Type | LRBA Permitted After Ban? |
|---|---|
| Residential houses and apartments | No - banned for new LRBAs |
| Residential land (zoned residential) | No - banned for new LRBAs |
| Commercial property (offices, retail, industrial) | Yes - unaffected |
| Rural and agricultural property | Yes (where used in a business) |
| Existing residential LRBA (grandfathered) | Yes - fully protected |
Commercial property LRBAs remain available. Under the new legislation, SMSFs continue to be permitted to borrow to acquire property that qualifies as "business real property" under the SIS Act, broadly meaning property used wholly and exclusively in one or more businesses. Commercial, industrial, and retail premises generally meet this definition. A further characteristic of business real property is that it may be leased back to a related party (such as a business operated by a fund member) subject to the existing related-party rules under the SIS Act, a feature not available with residential property investments.
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 contracts have not been exchanged: The window to enter a new residential LRBA is closing fast. Seek urgent legal and SMSF advice if you wish to proceed.
- 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 LRBA residential ban changes the landscape for SMSF property investment. At Altitude SMSF Accounting, we are helping clients understand what this means for their specific situation - whether that is reviewing an existing LRBA, exploring commercial property strategies, or considering alternatives. Contact us today to discuss your fund.
Further Reading
- ATO - Borrowing and LRBAs for SMSFs
- SMSF Association - Policy and Advocacy Updates
- Heffron - LRBA Technical Resources
- DBA Lawyers - LRBA Legal Guidance
This article has been prepared for general information purposes only and does not constitute financial, investment, legal or taxation advice. Altitude SMSF Accounting Pty Ltd does not hold an Australian Financial Services Licence (AFSL). Information in this article reflects the position as at 1 July 2026. The legislation received Royal Assent on 26 June 2026 and the ban commences 10 August 2026. Verify current requirements with the ATO or a qualified SMSF adviser before making any decisions.