A significant change to the rules governing self-managed superannuation fund borrowing took effect on 10 August 2026. From that date, new limited recourse borrowing arrangements can only be used to acquire business real property. The ability to borrow within an SMSF to purchase residential investment property has been removed.

The change was legislated as part of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which received royal assent on 26 June 2026. The commencement date of 10 August is 45 days after royal assent. The Tax Office has confirmed the rules are not retrospective and has published updated guidance explaining exactly when existing and future arrangements are affected.

What is a limited recourse borrowing arrangement?

A limited recourse borrowing arrangement is the structure that allows a self-managed superannuation fund to borrow money to purchase an asset. Under the arrangement, a lender provides funds to a holding trust that holds the asset on behalf of the SMSF. The SMSF makes payments under the arrangement and, once fully paid, the asset transfers to the fund. The lender's recourse in the event of default is limited to the asset held in the trust – hence limited recourse.

The arrangements have been popular as a way for SMSF trustees to leverage the fund's capital to acquire property - particularly residential investment properties and commercial premises.

What has changed from 10 August 2026?

For any new limited recourse borrowing arrangement entered into on or after 10 August 2026, the real property acquired under the arrangement must be business real property. Business real property is broadly defined as land and buildings used wholly and exclusively in carrying on one or more businesses. Typical examples that are likely to qualify include:

• Offices and commercial suites
• Warehouses and industrial premises
• Retail shops and shopping centre tenancies
• Medical and consulting rooms
• Factories and production facilities
• Primary production land used in an agricultural business.
  
  

Standard residential properties – houses, apartments, townhouses and units leased to residential tenants – do not qualify as business real property and cannot be acquired under a new limited recourse borrowing arrangement from 10 August 2026.

What is grandfathered?

The Tax Office has confirmed three categories of arrangements that are not affected by the new rules:

• Existing arrangements: Any limited recourse borrowing arrangement entered into before 10 August 2026 continues under the previous rules for its full term. Trustees are not required to restructure existing arrangements or sell the underlying property.
• Refinancing of existing arrangements: Where an SMSF refinances an existing arrangement after 10 August 2026, the new rules do not apply. The property does not need to satisfy the business real property test simply because the borrowing has been refinanced.
• Binding contracts exchanged before 10 August 2026: Where an SMSF exchanged a binding contract to acquire real property before 10 August 2026, the previous rules apply even where settlement has not yet occurred or the arrangement has not yet been formally entered into.

It is important to note that the grandfathering for binding contracts requires a legally binding exchange of contracts. Preliminary negotiations, finance approval, letters of intent and unsigned contracts do not qualify for protection.

What SMSF trustees can still do

The changes narrow what can be borrowed for, but do not restrict other fund activities:

• SMSFs can still purchase residential property using existing fund cash, without any borrowing arrangement. Only the ability to borrow to buy residential property is removed.
• Commercial property borrowing is completely unaffected. SMSFs can still enter new limited recourse borrowing arrangements to purchase business real property.
• Shares and other non-real property assets that were already eligible under a limited recourse borrowing arrangement remain eligible.
  

A common strategy that remains available

One of the most common applications of SMSF borrowing has been for business owners to use their fund to purchase the commercial premises from which they operate, and then lease those premises back to the operating business at market rates. This strategy is not affected by the 10 August 2026 changes – business real property used in the member's business can still be acquired under a new limited recourse borrowing arrangement.

However, the lease must continue to be conducted on arm's length commercial terms, with market rent supported by an independent appraisal, and the arrangement must not breach the sole purpose test. These requirements are unchanged.

If you were planning an SMSF residential property purchase using borrowing

If you were in the process of arranging a residential property purchase through your SMSF using a limited recourse borrowing arrangement and did not exchange a binding contract before 10 August 2026, the borrowing route is no longer available for that transaction.

Please contact us to discuss alternative approaches, including whether an unleveraged purchase from existing fund cash is possible or whether the strategy should be reconsidered in light of the new rules.

Please contact us if you have any questions - email us or phone our team on 02 9899 3044.