Unlock the Secrets to SMSF LRBA Structure Requirements

From August this year, the way Self-Managed Super Funds can borrow to buy property changed.

If you hold super in an SMSF and have been considering using those funds to acquire an investment property, the structure you use to borrow matters more than ever. A Limited Recourse Borrowing Arrangement allows your fund to borrow money to purchase property, but new rules now restrict which types of property you can acquire with borrowed funds. The holding trust structure remains the same, but residential property is no longer an option for new arrangements. Commercial property that meets the business real property definition remains available.

What Changed in the LRBA Rules This August

New LRBAs entered into from 10 August 2026 can only be used to acquire business real property. Residential property can no longer be purchased using borrowed funds under an LRBA, regardless of whether the lender is a bank, related party, or non-bank institution. Your SMSF can still own residential property outright if purchased without borrowing, and existing residential LRBAs entered into before the change are protected. Refinancing an existing residential LRBA remains possible without triggering the new rules, provided the arrangement is not significantly altered.

How the Holding Trust Structure Works Under an LRBA

The SMSF trustee holds a beneficial interest in the property, which is held in a separate trust until the loan is repaid. Legal ownership transfers to the SMSF once the final payment is made. If the loan defaults, the lender's recourse is limited to the property held in the trust. No other SMSF assets are at risk. Investment returns from the property flow to the SMSF during the loan term. The holding trust cannot be a discretionary trust or a unit trust where the SMSF is one of several unit holders.

Consider a Virginia-based SMSF trustee who entered into a binding contract to purchase a workshop in the northern industrial zone of Adelaide before the August cut-off. Even though settlement occurred after 10 August, the arrangement is protected under the transitional provisions. The SMSF established a bare trust to hold the property, with the trustee company as the beneficial owner. The loan was structured with limited recourse, and rental income from the tenant business now flows to the fund.

Business Real Property and the Wholly and Exclusively Test

Business real property means land and buildings used wholly and exclusively in one or more businesses. The property must be used for business purposes at the time your SMSF acquires it. A property marketed as commercial does not automatically qualify. The test depends on actual use, not zoning or marketing descriptions. A warehouse leased to a logistics company qualifies. An office building leased to a professional services firm qualifies. A shopfront leased to a retail business qualifies. A property with a residential component may not.

Mixed-use properties require detailed assessment. A primary production property with a dwelling occupying no more than 2 hectares may still qualify if the main use of the whole property is not domestic or private. This concession applies specifically to rural holdings and does not extend to suburban mixed-use buildings. Two separate titles cannot be purchased under a single LRBA unless they are distinctly identifiable as one asset with equal market value and bought and sold together.

Leasing Commercial Property to a Related Party

You can lease business real property held in your SMSF to a related party, including a business you own or control. The lease must be at arm's length and reflect market value. This arrangement is excluded from the in-house asset rules, which normally restrict related party transactions. Rent must be comparable to what an unrelated tenant would pay for similar premises in the same location. The ATO publishes safe harbour interest rates for LRBAs under Practical Compliance Guideline PCG 2016/5, which applies regardless of when your arrangement commenced. Income from an arrangement that does not meet arm's length terms may be taxed at 45 percent as non-arm's length income.

In our experience, Virginia residents who operate small businesses from commercial premises sometimes establish an SMSF to purchase the building their business occupies. The SMSF leases the property back to the business at market rent. The business pays rent, which becomes assessable income to the fund taxed at 15 percent during accumulation phase. The business claims the rent as a deductible expense. This structure can work well for sole traders or partnerships operating from a fixed location, provided the property satisfies the business real property definition and the lease reflects arm's length terms.

What Happens to Rental Income and Capital Gains

Rental income received by your SMSF is taxed at 15 percent during accumulation phase. Where the fund is paying a retirement-phase pension and the property supports that pension, rental income may be exempt from tax depending on whether the fund's assets are segregated or proportionate. A capital gain on sale is also taxed at 15 percent during accumulation phase, with a one-third discount available if the property has been held for at least 12 months. The effective rate on the discounted gain can be as low as 10 percent, but the actual tax depends on the property's cost base, selling costs, capital improvements, and the fund's overall tax position for that year.

Where the fund is fully in pension phase and assets are segregated as current pension assets at all times during the income year, the capital gain is disregarded entirely. Where the fund has both accumulation and pension interests, the exemption applies only to the proportion of the gain attributable to pension assets, as determined by an actuarial certificate. Capital losses can only be offset against capital gains, not against rental income, and unused losses are carried forward.

How Division 296 Tax Affects Property Held in Your SMSF

From 1 July 2026, members with a total superannuation balance exceeding $3 million at the end of the financial year are subject to an additional 15 percent tax on the proportion of earnings above that threshold. Where the balance exceeds $10 million, an additional 10 percent applies to the amount above that second threshold. Both thresholds are indexed annually. Division 296 tax applies to realised earnings, not unrealised increases in property value. Rental income and capital gains on sale contribute to the calculation. An increase in the market value of your property does not trigger Division 296 tax unless a CGT event occurs.

Outstanding LRBA loan amounts are disregarded when calculating your total superannuation balance for Division 296 purposes. If your SMSF holds a commercial property with a market value of $2 million and an outstanding loan of $800,000, your total superannuation balance includes the full $2 million, not the net equity. Your SMSF may elect to adjust the cost base of CGT assets to market value as at 30 June 2026 for Division 296 purposes, which recognises value that accrued before the new tax commenced. The election applies to all CGT assets held directly by the fund at that date, cannot be revoked, and must be made by the due date of the 2026-27 annual return.

Refinancing an Existing LRBA Without Triggering the New Rules

Existing residential LRBAs entered into before 10 August 2026 can be refinanced without the refinanced arrangement being subject to the new restrictions. The ATO considers refinancing to mean entering into a new loan contract for the same asset, with the same or a new lender. A significant change to the terms or conditions of an LRBA may end the existing arrangement and create a new one. Circumstances that may trigger this include refinancing that is inconsistent with the original arrangement, borrowing to acquire an asset not contemplated under the original loan, and changes to the ultimate beneficiaries.

Commercial LRBA refinancing is not affected by the August changes. The refinanced loan must relate to the same single asset, maintain the limited recourse character, and meet arm's length terms. If you are refinancing a commercial loan held within your SMSF, the property must continue to satisfy the business real property definition. If the property's use has changed since acquisition and it no longer meets that definition, your fund may face compliance issues. Seeking advice before refinancing is essential, particularly where the property's tenancy or use has changed since the original loan was established.

Contributions and Transfer Balance Caps from July This Year

The concessional contributions cap is $32,500 per annum from 1 July 2026. The non-concessional contributions cap is $130,000 per annum. The general transfer balance cap increased to $2.1 million on 1 July 2026. Members commencing a pension for the first time on or after that date have a personal transfer balance cap of $2.1 million. The bring-forward arrangement allows non-concessional contributions of up to $390,000 over three years where your total superannuation balance on 30 June of the previous year was below $1.84 million. Where your balance was between $1.84 million and $1.97 million, you can contribute up to $260,000 over two years. Where your balance was between $1.97 million and $2.1 million, the annual cap of $130,000 applies. Where your balance equalled or exceeded $2.1 million, the non-concessional contributions cap is nil.

These caps matter when planning how to fund a deposit or repay an LRBA loan ahead of schedule. If you are considering making additional contributions to your SMSF to pay down a commercial property loan, check your current balance and contribution history to avoid exceeding the caps. Excess contributions are taxed at penalty rates.

SMSF structures require coordination between your trustee obligations, the loan terms, and the tax rules that apply to your fund. If you are a Virginia resident considering using your super to acquire commercial property, or if you hold an existing LRBA and are weighing up your options for refinancing or restructuring, the rules have shifted. Call one of our team or book an appointment at a time that works for you.

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