The rules regarding the use of LRBAs to purchase residential property have changed as a result of a last-minute deal to ensure parliamentary passage of the 2026 federal budget. Tim Miller notes advisers and trustees need to be conscious not only of this amendment, but also the parameters that were already in place to manage fund compliance properly.
On 26 June 2026, the Treasury Laws Amendment (Tax Reform No 1) Act 2026 received royal assent and just 45 days later, on 10 August, one of the most significant changes to super borrowing was implemented since section 67A of the Superannuation Industry (Supervision) (SIS) Act was introduced in 2010.
Schedule 5 of the Treasury Laws Amendment (Tax Reform No 1) Act 2026, secured as part of a fast-tracked deal with the Greens to pass broader changes to capital gains tax and negative gearing, effectively ends the use of limited recourse borrowing arrangements (LRBA) to acquire residential property in an SMSF. For an area of super law that has barely changed in substance for over a decade, that was a remarkably short runway for trustees, advisers and lenders to adjust.
What actually changed
The legislation inserted a new paragraph (c) into section 67A(2) of the SIS Act. Where the asset being acquired under an LRBA is real property, that property must now meet the business real property (BRP) definition in section 66(5) of the SIS Act.
The change applies to any LRBA entered into on or after 10 August 2026, with grandfathering measures introduced for existing gearing agreements inclusive of transactions entered into prior to that date (see below).
In practice, this means residential investment properties, holiday homes and any mixed-use property can no longer be acquired through a new LRBA. BRP is now the only gateway to acquire real property using gearing.
BRP – the new gateway
Section 66(5) of the SIS Act defines BRP broadly as a freehold or leasehold interest in real property, or certain interests in Crown land, used wholly and exclusively in one or more businesses, whether or not that business is run by the fund’s own related party.
Self Managed Superannuation Funds Ruling (SMSFR) 2009/1 remains the ATO’s key guidance on what qualifies, and it is the use of the land, not any particular building or improvement on it, that determines the outcome. There is a limited carve-out for primary production land whereby a farm can still meet the wholly-and-exclusively test even where it includes a dwelling used for private purposes, provided that dwelling sits on no more than two hectares and the dominant use of the whole property is not domestic.
As stated above, there is no equivalent carve-out for a mixed-use property such as a shop with a flat upstairs. While vacant land can also qualify as BRP without any buildings on it at all, though land in the process of being developed raises its own characterisation questions, any change to that land is problematic under an LRBA. Residential-style property put exclusively to a genuine commercial use may satisfy the BRP definition, but it must be determined if it will be maintained that way for the term of the loan. It is important to maintain the definition throughout the entire arrangement.
The date that matters
For any client with a deal in progress, the critical date is the date of the contract, not settlement and not drawdown. A binding contract of sale entered into before 10 August 2026 falls outside the new rules even where settlement, or the borrowing itself, occurs afterwards. A contract exchanged on or after 10 August for a residential property will fail the BRP test outright, with no transitional relief for a late exchange.
Consider two clients who approached their adviser in the same week of July 2026, each intending to buy an investment unit through their SMSF using an LRBA. One exchanged contracts on 6 August and can proceed as planned. The other, waiting on a building inspection, did not exchange until 12 August and now finds the purchase cannot proceed via an LRBA unless the property satisfies the BRP test.
Recognising how little time the industry had to prepare, the ATO developed what has been described as a “rapid response”. Existing ATO publications were updated between mid-July and 3 August, and the regulator released dedicated guidance, “Changes to limited recourse borrowing arrangements”, on 28 July, addressing high-priority questions including exactly what needs to be in place for an ‘arrangement’ to be considered entered into before the deadline.
A state-by-state trap hiding in plain sight
For clients who did lock in a contract before the deadline, the mechanics of establishing the holding trust still need to be right, and the sequencing rules vary markedly by state and territory. In New South Wales, Western Australia, Tasmania and the Australian Capital Territory, the bare trust deed is executed after exchange of contracts. Victoria and South Australia allow execution after the contract, but require it before settlement, with Victoria imposing a further 30-day window for lodging the deed with the State Revenue Office. Queensland and the Northern Territory reverse the sequence entirely whereby the bare trust deed must be executed before the contract of sale is signed. Get that wrong in Queensland and duty may end up being assessed twice, on both the contract and the subsequent deed.
Naming conventions on the contract itself also differ between jurisdictions, with Queensland, Western Australia and the Northern Territory requiring the trust capacity to be disclosed. None of this is new law, but with so many clients trying to get contracts signed either side of 10 August, it is a timing trap that is easy to overlook under pressure and one worth checking before, not after, a client signs.
Grandfathering and how to lose it
Borrowing arrangements entered into before 10 August continue to be assessed under the pre-amendment version of SIS Act section 67A(1), even where the underlying asset is residential property. That protection extends to genuinely maintaining or refinancing a pre-commencement borrowing, the new proceeds must solely replace the earlier financing with no new asset introduced and no temporary shift of legal ownership to the SMSF trustee.
Partial compliance is not enough. The traps are equally clear. Refinancing onto a different asset, rather than the one originally secured, is treated as a new arrangement rather than a protected refinancing. Materially restructuring the loan, whether through a different lender, a new asset or terms that go beyond simply maintaining the existing borrowing, risks falling outside the exemption altogether. A restructure undertaken for entirely sensible commercial reasons, such as chasing a better rate, can inadvertently strip away a client’s grandfathered status if it is not handled carefully.
Do not lose sight of the fundamentals
Amid the focus on the new BRP requirement, it is worth remembering the existing LRBA rules have not gone anywhere and remain the more common source of breaches. The single acquirable asset test still catches funds out, particularly with multi-title properties such as two adjacent premises. Independently saleable blocks are two separate assets requiring two LRBAs even where the fund runs one business across both (SMSFR 2012/1).
Construction financing catches out funds in a similar way. An LRBA cannot fund building a house on land the fund already owns outright because the finished house has no existence separate from the land that could be held on trust. The same problem arises where vacant land is acquired under an LRBA and the same borrowing is then meant to also fund construction, which fails from the point building starts because the asset’s character changes.
The fix is a single contract to buy land with a house yet to be built, settling only on completion. And borrowed monies can still never be used to fund an improvement, only a repair or maintenance, a distinction that is not always obvious. Replacing a broken evaporative cooling system with a modern reverse-cycle unit that also provides heating is an improvement, not a repair, precisely because it adds a function the asset never had, and the whole arrangement is put at risk if that upgrade is funded from a further LRBA drawdown rather than the fund’s own cash.
The safe-harbour terms in Practical Compliance Guideline (PCG) 2016/5 have also moved again. The Reserve Bank of Australia benchmark rate applicable for related-party LRBAs meeting the safe harbour has increased for 2026/27, while commercial lending has moved in the opposite direction:
| PCG 2016/5 safe-harbour rate | 2025/26 | 2026/27 |
| Real property | 8.95% | 9.35% |
| Listed shares or units | 10.95% | 11.35% |
Commercial lenders are currently offering variable rates from around 6.74 per cent, meaning the gap between the safe-harbour benchmark and genuine market pricing has widened further.
It is worth revisiting with existing clients whether restructuring toward an arm’s-length commercial loan is now more attractive than persisting with safe-harbour terms purely for compliance comfort. It’s also important to note not all lenders will lend for commercial properties.
A quirk worth flagging – LRBAs and Division 296
One technical point is worth raising with clients approaching the $3 million threshold. A related-party or associate LRBA (or a loan where the member has satisfied a nil cashing restriction condition of release) that is still outstanding is added back to a member’s total superannuation balance (TSB) under section 307-230(1)(d) of the Income Tax Assessment Act 1997 (ITAA) for most purposes, including contribution cap eligibility. Section 296-260 of the ITAA, however, specifically disregards that add-back when calculating TSB for Division 296 purposes. The same loan can genuinely produce two different TSB outcomes depending on what the calculation is for, so it cannot be assumed the add-back applies uniformly across every use of TSB.
Ending an LRBA is a deadline of its own
New arrangements are not the only ones that need attention. The safe-harbour terms in PCG 2016/5 cap a related-party real property LRBA term at 15 years, and loans entered into following the 7 July 2010 changes, when SIS Act sections 67A and 67B were first introduced, are reaching that limit. Refinancing on the same related-party safe-harbour terms does not extend the term. Genuinely extending it requires refinancing with an unrelated commercial lender.
Forgiving the debt is not a free exit either, as under Taxation Ruling 2010/1, debt forgiveness is treated as a contribution and may result in members exceeding their caps. Once the loan is fully repaid, the in-house asset exemption for the holding trust’s assets under section 71(8) of the SIS Act stops immediately. It means the asset needs to be dealt with promptly, whether that involves transferring legal title to the SMSF, which brings a mortgage discharge, a transfer and possibly stamp duty, or formally continuing to administer the holding trust. Either way, a review of each related-party LRBA well before its term expires is prudent as the exit options are far easier to manage as a planned decision than a last-minute one.
Conclusion
The residential property ban is the headline, but it is a narrow, targeted change bolted onto a framework that otherwise remains intact. The real risk for advisers is not misunderstanding the new BRP requirement so much as losing focus on everything else that continues to apply, such as the single acquirable asset test, the repairs-versus-improvements line, state-based trust timing and now a second calculation for anyone near the Division 296 threshold. For any client with an LRBA already in place, or a related-party arrangement now bumping up against its 15-year safe-harbour term limit, this is a good moment for a full health check, not just a scan for the new rule.
