SMSFs will be impacted by revised safe-harbour interest rates and the changes to negative gearing contained in this year’s budget. Bryce Figot and Daniel Butler examine the potential consequences.

The latest interest rates pertaining to limited recourse borrowing arrangements (LRBA) involving related parties and the changes to negative gearing handed down in the 2026 federal budget have implications for SMSFs.

New LRBA related-party interest rates

Many SMSFs that borrow do so from a related-party lender. In this case, SMSFs often choose to replicate the safe-harbour terms in ATO Practical Compliance Guideline (PCG) 2016/5. The advantage of doing this, as the ATO says in the guideline, is as follows: “… for income tax compliance purposes, the commissioner accepts that an LRBA structured in accordance with this guideline is consistent with an arm’s-length dealing and that the NALI (non-arm’s-length income) provisions do not apply purely because of the terms of the borrowing arrangement.”

Under the PCG 2016/5, the interest rate for real estate is the: “Reserve Bank of Australia (RBA) Indicator Lending Rates for banks providing standard variable housing loans for investors. Applicable rates: … for the 2016/17 and later years, the rate published for May (the rate for the month of May immediately prior to the start of the relevant financial year).”

Recently, the RBA published the rate for May 2026 of 9.35 per cent. Of course, that rate is what related-party LRBAs using PCG 2016/5 should adopt from 1 July 2026 for the 2027 income year.

Compare 9.35 per cent to the PCG 2016/5 rate for the 2016 financial year, that is, around a decade ago when the guidance was first introduced, namely, 5.95 per cent. In other words, interest rates are now significantly higher. The odds of seeing a negatively geared SMSF are therefore also higher.

What good is negative gearing in SMSFs?

Negative gearing is typically most valuable in the hands of taxpayers on a high marginal rate of income tax.

SMSFs typically pay a top rate of 15 per cent tax. This, of course, is a relatively low rate of tax compared to say individual taxpayers who can pay up to 45 per cent plus the Medicare levy.

Accordingly, a $100 negatively geared loss in an SMSF might only save $15. In contrast, that same $100 negatively geared loss for a high-earning individual might save $47.

However, negatively geared losses in an SMSF offset any other assessable income of the fund. Such income might include concessional contributions. Remember, even if an SMSF is otherwise entirely in pension mode, concessional contributions are still assessable income.

Accordingly, consider an SMSF where:

• the SMSF recently borrowed $1 million from a related party to acquire a residential dwelling under an LRBA,
• the LRBA complies with PCG 2016/5,
• the SMSF earns net rent (before interest) of $20,000 yearly from the residential dwelling, and
• the fund has three members, all of whom have made $32,500 of concessional contributions in the 2027 financial year, that is, a total of $97,500 (3 x $32,500).

That SMSF might be negatively geared by around $73,500. Of course, this is calculated as $20,000 of net rent less $93,500 of interest (that is, $1 million x 9.35 per cent of interest).

That negatively geared loss could offset the concessional contributions. Accordingly, the SMSF would probably not have to pay the usual $14,625 in respect of the contributions. This is calculated as 15 per cent multiplied by $97,500. Instead, the SMSF might only need to pay $3600 (15 per cent x ($97,500 – $73,500)). Naturally, this represents a $11,025 saving.

Of course, the SMSF trustee should still consider whether negatively gearing is prudent and appropriate due to, among other things, the investment covenants in section 52B(2) of the Superannuation Industry (Supervision) Act 1993. These covenants require SMSF trustees:

(f) to formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the fund including, but not limited to, the following:

• the risk involved in making, holding and realising, and the likely return from, the fund’s investments, having regard to its objectives and its expected cash-flow requirements,
• the composition of the fund’s investments as a whole, including the extent to which the investments are diverse or involve the fund in being exposed to risks from inadequate diversification,
• the liquidity of the fund’s investments, having regard to its expected cash-flow requirements,
• the ability of the fund to discharge its existing and prospective liabilities.

The covenants in section 52B(2)(f) are also reflected in the operating standard imposed on SMSFs to formulate, review regularly and give effect to an investment strategy under regulation 4.09 of the Superannuation Industry (Supervision) Regulations 1994. There is one additional requirement in regulation 4.09 that needs to be satisfied in addition to those listed above, namely:

(e) whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.

The cash flow and ability to discharge liabilities are key concerns when an SMSF has a negatively geared investment. Having such an investment requires consideration of making ongoing loan repayments and other expenses at times during periods where no income may be derived.

Impact of the 2026/27 budget

The 2026/27 federal budget announced, among other things, limits on negative gearing. However, it stated superannuation would be excluded from this measure. For example, the budget states: “The reforms to negative gearing … are prospective and respect previous investment decisions, and will not impact … superannuation tax arrangements.”

Indeed, consider the Treasury Laws Amendment (Tax Reform No 1) Act 2026 passed by parliament on 25 June and granted royal assent on 26 June.

This act introduces the announced limits on negative gearing. It excludes a complying superannuation entity. Refer to the new section 26-155(4)(b) of the Income Tax Assessment Act 1997. The act’s changes take effect from the 2028 financial year.

However, there are many SMSFs that might be indirectly exposed to negative gearing. For example, consider an SMSF where:

• in the 2028 financial year, the SMSF acquires 50 per cent of the units in a newly established unit trust (not a related trust),
• the unit trust takes out a loan to acquire a residential dwelling held as residential accommodation,
• the unit trust has a total of $18,000 of gross income comprised of $15,000 of rent from the residential dwelling and $3000 of interest income from a bank account,
• the unit trust has $20,000 of interest expense on a bank loan used to acquire the residential dwelling, and
• for simplicity, it is assumed there are no other income or expenses.

On its face, the unit trust will be negatively geared with a net loss position of $2000 (calculated as $15,000 – $20,000 + $3000). However, the unit trust will have $3000 of ‘net income’ to distribute to its unitholders. The negatively geared loss of $5000 in the 2028 income year is carried forward by the trustee of the unit trust for the next income year. Accordingly, the SMSF will have $1500 of assessable income (50 per cent x $3000) from the unit trust.

It should be considered that the new section 26‑155(7) of the Income Tax Assessment Act generally applies to a beneficiary of a trust that derives net income from a trust to the extent that such income relates to residential accommodation.

For example, if a unitholder negatively geared their units in a unit trust and that unit trust derives income from the use of residential dwellings acquired after 7:30pm on 12 May 2026 as residential accommodation, then the new negative gearing restriction applies to that unitholder.

In essence, the negative gearing limit applies to the extent that the income from the unit trust is referable, either directly or indirectly through one or more interposed partnerships or trust estates, to using or holding a residential dwelling as residential accommodation.

However, an SMSF that negatively gears units in a unit trust may not be impacted as complying superannuation entities are excluded from section 26-155 of the Income Tax Assessment Act.

Note, residential dwellings acquired before 7:30pm on 12 May 2026 are not subject to the new negative gearing limits nor are commercial and non-residential properties.