From 10 August 2026 an SMSF can no longer enter a new Limited Recourse Borrowing Arrangement to buy residential property. Existing residential LRBAs continue unchanged, and contracts exchanged on or before 9 August 2026 are protected. SMSFs can still borrow to acquire business real property, and can still buy residential property outright with the fund’s own cash. Refinancing an existing LRBA is permitted only on substantially the same terms — a top-up, equity release or change of security may count as a new LRBA and be caught by the ban.
Self-managed superannuation funds (SMSFs) are generally prohibited from borrowing. The Superannuation Industry (Supervision) Act 1993 (SIS Act) contains a broad borrowing prohibition under section 67, which exists to protect member benefits from the risks that come with leverage. There is, however, a specific exception: section 67A allows SMSFs to borrow through a structure called a Limited Recourse Borrowing Arrangement (LRBA). Understanding what an LRBA is, how it works, and where it creates risk is essential for any SMSF trustee considering geared property within their fund.
What changed on 10 August 2026?
New residential LRBAs are no longer permitted. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June 2026 and commenced on its 45th day — 10 August 2026. From that date an SMSF cannot enter a new Limited Recourse Borrowing Arrangement to acquire residential property. Everything below about how LRBAs are structured, taxed and stress-tested still applies — to existing arrangements, and to the borrowing that is still allowed.
What the change does and does not do:
- Banned: new LRBAs to acquire residential property, from 10 August 2026.
- Still allowed: LRBAs to acquire business real property as defined in section 66 of the SIS Act 1993 — so commercial, industrial and genuine business premises (including the business-owner strategy described further down) are unaffected.
- Still allowed: buying residential property outright from the fund's own cash. The ban is on borrowing, not on the asset class.
- Grandfathered: every existing residential LRBA continues on its terms. The measure is prospective — it does not unwind arrangements already in place.
- Protected by contract date: a contract exchanged on or before 9 August 2026 is not caught, even if settlement occurs afterwards.
Two adjacent reforms in the same Act matter for anyone modelling geared property generally: the 50% CGT discount is removed for gains accruing from 1 July 2027 (replaced by cost-base indexation plus a 30% minimum tax on capital gains), and negative gearing is limited to new builds from 1 July 2027, biting on residential property purchased after 7:30pm on 12 May 2026. Those apply outside super as well as in it. See our companion article on the 2026 tax reforms for the full timeline.
What is the LRBA structure?
An LRBA involves the SMSF borrowing money from a lender — typically a bank or a non-bank specialist lender, though related-party loans from members are also possible — to acquire a single asset, most commonly property. The defining structural feature is that the lender's recourse in a default is limited to the asset itself; other SMSF assets cannot be touched if the loan goes bad. This limited recourse protection is the heart of the arrangement and the reason the exception to the borrowing prohibition was created: it allows geared acquisition while preventing a defaulting loan from wiping out the entire fund.
During the life of the loan, legal title to the asset is held by a separate bare trust, not by the SMSF itself. The SMSF holds beneficial ownership and is entitled to the income and use of the asset, but legal title only transfers to the SMSF once the loan is fully repaid. The bare trust is transparent for tax purposes — income, gains, and expenses of the asset are attributed directly to the SMSF, not treated as separate trust income.
The asset acquired must be a "single acquirable asset" — a single, identifiable thing rather than a portfolio. For most LRBAs, this is a single residential or commercial property. Commercial property is particularly common, especially for business owners whose operating companies occupy the premises.
Who lends for LRBAs and what are the terms?
For most of the 2010s, the major banks were the primary source of LRBA finance. Following APRA guidance issued in September 2018 — which flagged LRBAs as a source of risk and encouraged lenders to review their exposure — the major banks largely withdrew from or substantially reduced their LRBA lending. Non-bank specialist lenders continue to provide LRBA finance and represent the mainstream market today.
Loan-to-value ratios are generally lower than for personal property lending — typically in the range of 60–70% of the property's value for residential LRBA properties and around 65–75% for commercial, though these vary between lenders and are not statutory limits.
Related-party loans — where SMSF members or their associates lend to the fund — are permitted but must satisfy the arm's length requirements under section 109 of the SIS Act. The ATO's Practical Compliance Guideline PCG 2016/5 provides a safe harbour for related-party LRBA loans: provided the loan meets the safe harbour conditions (a maximum 70% loan-to-value ratio for real property, principal-and-interest repayments, a registered mortgage as security, and a loan term not exceeding 15 years), the ATO will not treat the arrangement as non-arm's length. The interest rate under the safe harbour is benchmarked to the RBA's indicator lending rates plus a margin — the specific applicable rate should be confirmed with the ATO, as it moves with RBA rates. Funds that don't meet the safe harbour are not automatically non-compliant, but the arm's length standard must be satisfied through other means.
How is an LRBA property taxed in an SMSF?
The tax treatment of an LRBA property generally follows standard SMSF tax rules. Interest paid on the LRBA loan is deductible to the fund. Rental income is assessable — taxed at 15% during the accumulation phase, reducing to 0% once the fund (or the relevant member's proportion) moves into pension phase. Capital gains on disposal attract the standard CGT treatment: a one-third discount applies where the asset has been held for more than 12 months, and the discounted gain is included in the fund's assessable income and taxed at the applicable rate (15% in accumulation, 0% in pension phase).
The combination of a rental income stream taxed at 15% or 0%, deductible interest, and a discounted capital gain at disposal is what makes the LRBA structure attractive from a tax perspective, particularly for assets held through the member's transition to pension phase.
How does an LRBA work for a business owner?
The LRBA is particularly appealing for business owners whose companies pay market rent for commercial premises. Consider a fund with $600,000 in accumulated benefits. The SMSF acquires the business's operating premises for $1 million using an LRBA — $400,000 from the fund and $600,000 from an LRBA loan. The business pays commercial rent to the fund, which is deductible to the company and assessable to the fund at 15% (or 0% in pension phase). The rent services the loan and the members continue contributing. At retirement, the rent continues to flow into the fund, supporting pension drawdowns, and the property has been accumulated within the super system rather than outside it. Converting a recurring business expense (rent) into a super asset is a well-established use of the LRBA framework.
What are the main risks and traps with LRBAs?
The major risk is concentration: a single LRBA property can represent a very large proportion of an SMSF's total assets, creating a heavily concentrated exposure to a single asset in a single location. Property markets can fall, tenants can default, and insurance gaps can materialise. A fund heavily weighted to a single LRBA property is exposed in ways a diversified fund is not.
A specific and commonly misunderstood restriction is the distinction between repairs and improvements. Repairs — restoring the asset to its original condition — can be funded from any source, including the LRBA loan. Improvements — adding to, upgrading, or substantially changing the asset — generally cannot be funded from borrowed money under the LRBA. A member who expects to renovate the property using loan funds typically finds this is not permitted; renovation costs need to come from fund cash or member contributions rather than the loan itself. This distinction matters substantially for properties requiring significant work.
Liquidity is another practical concern. Property is illiquid and cannot be partially sold. The fund must maintain sufficient liquid assets (cash, shares) to service the LRBA loan repayments, meet minimum pension drawdown obligations in pension phase, and cover running costs. A fund that commits too large a proportion of its balance to the property can find itself unable to meet these obligations without selling assets at an inopportune time.
Finally, the transition of an LRBA into pension phase requires careful planning — drawdown requirements, loan servicing obligations, and property income need to align. And member death while an LRBA is outstanding creates its own complexities for bare trust transfer and loan continuation that need to be addressed in both the fund's trust deed and estate planning.
LRBAs are technically demanding. The bare trust documentation, lender requirements, arm's length compliance, the repairs-versus-improvements boundary, and transition planning all require specialist input. Specialist SMSF legal advice for establishment, specialist SMSF accounting for ongoing compliance, and financial advice on whether the strategy is appropriate for the individual's circumstances are all genuinely necessary — not optional additions.
Key takeaways
- From 10 August 2026 the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 prohibits an SMSF from entering a new LRBA to acquire residential property. The measure is prospective: existing residential LRBAs are grandfathered and continue on their terms, and a contract exchanged on or before 9 August 2026 is not caught even if it settles later.
- Borrowing to acquire business real property (SIS Act s.66) is unaffected, so the business-premises strategy still works. Buying residential property outright from the fund’s cash is also unaffected — the ban is on the borrowing, not the asset.
- Refinancing an existing residential LRBA is allowed only on substantially the same terms. A top-up, equity release or change to the underlying security risks being treated as a new LRBA and caught by the ban — have the terms reviewed before signing.
- The SIS Act generally prohibits SMSF borrowing, but section 67A allows Limited Recourse Borrowing Arrangements (LRBAs). The SMSF borrows to acquire a single acquirable asset — most commonly property — and the lender's recourse on default is limited to that asset alone. Legal title is held by a separate bare trust until the loan is fully repaid, at which point title transfers to the SMSF.
- Rental income from an LRBA property is taxed at 15% in the accumulation phase and 0% where the fund or the relevant member proportion is in pension phase. Interest on the loan is deductible. Capital gains on disposal attract a one-third CGT discount after 12 months, with the discounted gain taxed at 15% in accumulation or 0% in pension phase.
- Related-party LRBA loans — where SMSF members lend to the fund — must satisfy the arm's length standard under SIS Act s.109. The ATO's PCG 2016/5 safe harbour requires a maximum 70% LVR for real property, principal-and-interest repayments, a registered mortgage as security, and a loan term of no more than 15 years, with interest benchmarked to RBA indicator rates.
Frequently asked questions
Can an SMSF still borrow to buy residential property in 2026?
No — not under a new arrangement. From 10 August 2026 the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 prohibits an SMSF from entering a new Limited Recourse Borrowing Arrangement to acquire residential property. A contract exchanged on or before 9 August 2026 is protected even if it settles afterwards, and every existing residential LRBA continues unchanged. An SMSF can still buy residential property outright using its own cash, and can still borrow under an LRBA to acquire business real property.
Can I refinance an existing SMSF residential property loan after the ban?
Yes, but only on substantially the same terms. A straight refinance of an existing residential LRBA — including to a different lender — is permitted. However, an arrangement that involves a top-up, an equity release, or a change to the underlying security may be treated as a new LRBA, which would then be caught by the ban. Because the consequence of getting this wrong is a non-complying borrowing inside your fund, have the proposed terms reviewed by an SMSF specialist before you sign anything.
What is an LRBA and how does it work in an SMSF?
An LRBA (Limited Recourse Borrowing Arrangement) allows an SMSF to borrow money to acquire a single acquirable asset — most commonly real property. The lender's recourse on default is limited to that asset alone; other SMSF assets cannot be seized. During the loan, legal title to the asset is held by a separate bare trust, with the SMSF holding beneficial ownership and receiving income. Title transfers to the SMSF when the loan is fully repaid.
Can SMSF members lend money to their own fund for an LRBA?
Yes. Related-party loans — where members or their associates lend to the SMSF — are permitted but must satisfy the arm's length requirements of section 109 of the SIS Act. The ATO's Practical Compliance Guideline PCG 2016/5 provides a safe harbour: provided the loan has a maximum LVR of 70% for real property, uses principal-and-interest repayments, has a registered mortgage as security, and does not exceed 15 years, the ATO will not treat it as non-arm's length. The interest rate is benchmarked to the RBA's indicator lending rates; the current applicable rate should be confirmed with the ATO.
How is an LRBA property taxed inside an SMSF?
Rental income is assessed in the fund and taxed at 15% during the accumulation phase, reducing to 0% for any portion of the fund in pension phase. Interest on the LRBA loan is deductible to the fund. On disposal, capital gains attract a one-third CGT discount if the property has been held for more than 12 months — the discounted gain is then taxed at 15% in accumulation or 0% in pension phase. The combination makes the tax treatment of LRBA property held through the pension phase particularly attractive.
What are the biggest risks with LRBAs in an SMSF?
Concentration risk is the primary structural concern — a single LRBA property can represent a very large proportion of total SMSF assets, with no partial sale available if circumstances change. A commonly misunderstood restriction is that improvements to the property generally cannot be funded from the LRBA loan itself; only repairs to restore the existing asset are permitted. Liquidity is a practical concern: the fund must maintain enough liquid assets to service the loan, meet minimum pension drawdown obligations, and cover running costs throughout the loan term.