When to Structure an SMSF Loan as a Limited Recourse Arrangement

The Core Restriction That Took Effect in August

Limited recourse borrowing arrangements entered into on or after 10 August 2026 can only be used to acquire business real property. Residential property can no longer be purchased under an SMSF loan structure unless you exchanged a binding contract before that date. The restriction applies regardless of whether you borrow from a bank, non-bank lender, or related party, and it does not prevent an SMSF from owning residential property outright without debt.

Consider a fund with $800,000 in accumulation balances held by two members. Prior to 10 August, that fund could have borrowed an additional $400,000 under a limited recourse borrowing arrangement to acquire a residential investment property valued at the suburb's median. After 10 August, that same structure can only be used to acquire business real property. The fund may still purchase residential property, but only if it uses existing member balances without borrowing.

The legislative change inserted a new condition into subsection 67A(2) of the Superannuation Industry (Supervision) Act 1993. The purpose is to restrict leveraged residential property acquisition within super while preserving the ability of SMSFs to hold commercial property that supports business activity.

Business Real Property Under Section 66

Business real property means land and buildings used wholly and exclusively in one or more businesses. The business does not need to be carried on by the SMSF. A medical centre leased to a GP practice, a warehouse leased to a logistics operator, or a retail tenancy leased to a cafe operator can all qualify, provided the property is used wholly and exclusively for business purposes at the time of acquisition.

Whether a property satisfies the definition is a question of fact. A property marketed as commercial does not automatically meet the test. The ATO's guidance in SMSFR 2009/1 makes clear that actual use, not zoning or marketing description, determines compliance. A property with mixed residential and commercial use may not qualify in full, or at all, depending on how the space is allocated and used.

In our experience, a Wilston property owner operating a consulting practice from a ground-floor tenancy with a residential apartment above would need to carefully assess whether the whole property satisfies the wholly and exclusively test. Where part of the property is used for domestic purposes, the entire property may fail the definition unless the dwelling component occupies no more than 2 hectares and the property is used primarily for primary production, a narrow exception that does not apply to urban commercial properties.

The Holding Trust Structure You Cannot Avoid

The borrowed money must be used to acquire a single asset held in a separate holding trust. The SMSF acquires a beneficial interest in that asset and obtains legal ownership after the loan is repaid. If the loan defaults, the lender's recourse is limited to the asset held in the trust. No other SMSF assets are at risk.

The holding trust cannot be a discretionary trust. The SMSF trustee must hold a beneficial interest in the asset and the right to acquire legal ownership by making one or more payments. A unit trust structure in which the SMSF trustee is one of several unit holders does not satisfy the requirement. The structure must give the SMSF a direct path to legal ownership once the debt is discharged.

Borrowed funds can be used to cover the acquisition cost, loan establishment fees, and stamp duty. They cannot be used to improve an existing asset. An existing fund asset cannot be placed into a limited recourse borrowing arrangement after the fact. Drawdowns for capital improvements are not permitted for arrangements entered into on or after 7 July 2010. The asset cannot be subject to any charge other than the charge under the limited recourse borrowing arrangement itself.

Refinancing Existing Residential LRBAs After August

The changes do not affect the refinancing of arrangements existing prior to 10 August 2026. The ATO considers refinancing to mean entering into a new loan contract for the same asset, with the same or a new lender. A compliant residential LRBA in place before 10 August can be refinanced to another lender without the refinanced arrangement being subject to the post-commencement rules.

A significant change to the terms or conditions of an existing LRBA may end the arrangement and trigger a new one. Refinancing that is inconsistent with the original arrangement, borrowing to acquire an asset not contemplated under the original structure, or a change to the ultimate beneficiaries of the arrangement can all result in the existing arrangement ending. A new arrangement entered into on or after 10 August that involves residential property cannot proceed under an LRBA.

For commercial property loans, refinancing remains available without restriction. The refinanced loan must relate to the same single acquirable asset, maintain the limited recourse character of the original arrangement, and meet arm's length terms consistent with the ATO's safe harbour rates published annually in Practical Compliance Guideline PCG 2016/5. Income from an arrangement that does not meet arm's length terms may be assessed as non-arm's length income and taxed at 45 percent.

Loan-to-Value Ratio and Deposit Requirements

Most lenders offering SMSF loans for business real property require a maximum loan-to-value ratio of 70 percent. A property acquired for $1,000,000 would require a deposit of at least $300,000 from the SMSF's existing member balances, plus settlement costs including stamp duty, legal fees, and loan establishment costs. These amounts must be held within the fund prior to settlement and cannot be borrowed.

The SMSF cannot borrow to cover the deposit. Member contributions can be made to increase the fund's cash balance, subject to the concessional and non-concessional contribution caps. From 1 July 2026, the concessional cap is $32,500 per annum and the non-concessional cap is $130,000 per annum. The bring-forward arrangement allows up to $390,000 in non-concessional contributions over three years where the member's total superannuation balance on 30 June of the previous year was below $1.84 million.

Consider a scenario where an SMSF with two members and $600,000 in combined balances intends to acquire a business property for $850,000. A 70 percent LVR produces a maximum loan of $595,000, requiring a deposit of $255,000 plus settlement costs of approximately $50,000 to $60,000. The fund has sufficient cash to proceed. If the same fund intended to acquire a property for $1,200,000, the deposit and costs would exceed $420,000, requiring additional contributions or preventing the acquisition entirely.

Capital Gains Tax Treatment in Accumulation and Pension Phase

A complying SMSF is taxed at 15 percent on its assessable income, including net capital gains. Where an asset has been held for at least 12 months, a one-third CGT discount may apply, producing a maximum effective rate of 10 percent on the discounted gain. The actual tax liability depends on the property's adjusted cost base, acquisition and selling costs, capital improvements, capital works deductions, capital losses, and the fund's overall tax position for that year.

A capital gain is not automatically tax-free because the fund has commenced a pension. SMSFs can receive a tax exemption on investment income from assets that support a retirement-phase income stream, called exempt current pension income. Where a fund's assets are fully segregated as current pension assets at all times during the income year, a capital gain on disposal of those assets is disregarded. Where the fund uses the proportionate method, the exemption applies only to the exempt proportion of the net capital gain, as determined by an actuarial certificate.

An SMSF with both accumulation and pension interests will have partial ECPI exemption only. The outcome depends on the ECPI method used, whether an actuarial certificate is required, whether minimum pension payment requirements have been satisfied, and the fund's specific circumstances. Where a property supporting a pension interest is sold and produces a $200,000 capital gain, and 60 percent of the fund's balance is in pension phase, the exempt proportion of that gain is $120,000 and the remaining $80,000 is taxable at the fund's applicable rate.

Division 296 Tax and Unrealised Property Gains

From 1 July 2026, where a member's total superannuation balance at the end of the financial year exceeds $3 million, Division 296 tax of 15 percent applies to the proportion of earnings attributable to the amount above that threshold. Where the balance exceeds $10 million, an additional 10 percent Division 296 tax applies to the proportion above that threshold. Both thresholds are indexed in increments of $150,000 for the $3 million threshold and $500,000 for the $10 million threshold.

For SMSF purposes, Division 296 fund earnings are an adjusted amount of the fund's taxable income. A capital gain must be realised through a CGT event for it to form part of the fund's assessable income and therefore the Division 296 earnings base. An unrealised increase in property value does not constitute a CGT event and does not by itself produce assessable income or Division 296 fund earnings. Rental income and realised capital gains may contribute to the Division 296 calculation.

LRBA amounts are disregarded when calculating a member's total superannuation balance for Division 296 tax purposes. A property held in a bare trust under a limited recourse borrowing arrangement is valued at its market value less the outstanding loan balance for the purposes of calculating the member's balance. Where a member holds a beneficial interest in a $1,200,000 property with an outstanding loan of $600,000, the net value included in the member's total superannuation balance is $600,000.

Sole Purpose Test Compliance Across All LRBA Structures

The sole purpose test under section 62 of the SIS Act requires trustees to ensure the fund is maintained solely to provide retirement benefits to members. All SMSF investments, including property held under a limited recourse borrowing arrangement, must satisfy this test at all times. Any trustee who maintains an SMSF for other purposes contravenes this requirement.

Business real property leased to a related party of the fund is excluded from the in-house asset rules, provided the lease is made on arm's length terms at market value. A member operating their own business cannot occupy the property on terms more favourable than those available to an unrelated tenant. Rent must be set at market rates, lease terms must reflect commercial standards, and the arrangement must be documented in writing.

Decisions that give members or related parties a present-day benefit may contravene the sole purpose test. A property selected primarily for its location near a member's residence, leased to a related party at below-market rent, or improved using fund assets in a manner that disproportionately benefits one member over others can all raise compliance concerns. The test applies throughout the life of the investment, not only at acquisition.

If you are considering whether a limited recourse borrowing arrangement is suitable for your SMSF, or whether a property you are evaluating qualifies as business real property under the current rules, call one of our team or book an appointment at a time that works for you. We work with SMSF trustees across Wilston and the surrounding northern Brisbane suburbs to structure borrowing arrangements that meet both legislative requirements and your fund's long-term objectives.

Frequently Asked Questions