SMSF Borrowing Rules in Australia 2026: What the End of SMSF Property Borrowing Means for Property Investors
23 Jun 2026
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On 23 June 2026, the Federal Parliament passed the Albanese government's tax package with Greens support. Tucked inside the legislation was a last-minute amendment with significant consequences for property investors: the exemption that allowed self-managed super funds (SMSFs) to borrow money to purchase residential investment properties has been abolished.
This closes what the financial services sector has long called a structural loophole - one that a landmark 2014 review by former CBA chief David Murray recommended ending over concerns about banking sector stability. More than a decade later, it is finally law.
If you currently hold residential property inside an SMSF, or were planning to use one to buy an investment property, this article explains exactly what has changed, what is protected, and what to do next.
A Limited Recourse Borrowing Arrangement (LRBA) is the legal structure that allowed SMSFs to borrow money to buy an asset - including residential property. Since 2007 it has been a popular strategy for property investors who wanted to combine the tax advantages of superannuation with direct property ownership.
| How LRBAs worked | What it meant |
|---|---|
| SMSF borrows from a lender | The loan is 'limited recourse' - if the fund defaults, the lender can only seize the specific property purchased, not other SMSF assets |
| A bare trust holds legal title | The property sits in a separate trust while the loan is outstanding; the SMSF holds the beneficial interest |
| Rental income flows to the SMSF | Taxed at the concessional 15% super rate - significantly below personal marginal rates |
| Title transfers on repayment | Once the loan is fully repaid, the property moves into the SMSF's name outright |
The attraction was straightforward: use super leverage to buy a property you could not afford outright, pay 15% tax on rental income instead of your marginal rate, and retain full control over which property you chose. From 23 June 2026, that option is gone for new arrangements.
The amendment passed on 23 June 2026 makes three connected changes:
| Change | What it means | When it applies |
|---|---|---|
| 1. No new residential LRBAs | SMSFs can no longer take out new borrowings to purchase residential real estate | Effective from 23 June 2026 |
| 2. Existing LRBAs grandfathered | If your SMSF already has a loan on a residential property, the arrangement can continue to its natural end | No forced unwinding required |
| 3. Commercial LRBAs unchanged | Borrowing to buy business real property - a shop, warehouse or factory used in your business - is not affected | No change |
The 2007 rule change that permitted LRBAs was always controversial. The Murray Financial System Inquiry recommended closing the loophole in 2014 - and nothing happened. Here is why it stayed, and why it goes now:
| Factor | Detail |
|---|---|
| Why LRBAs were allowed | Gave SMSF trustees flexibility. Allowed Australians to invest in property they understood, using super savings they had built up over decades. |
| Why critics opposed them | Created leverage inside a retirement safety net. Murray warned in 2014 of systemic banking risk if LRBAs became widespread. |
| Why they survived until 2026 | The strategy affected fewer than 1% of all home loans nationally - too small to justify the political cost of acting. |
| Why they end now | The Greens demanded the change as a condition of supporting Labor's broader tax package. Labor accepted - describing it as a minor concession given the limited market footprint. |
💡 The numbers in context
Residential LRBAs account for less than 1% of all Australian home loans. Approximately 8,000–10,000 SMSFs hold residential property under an LRBA nationally. The rule is narrow in reach - but significant for those it directly affects.
The simplest way to understand the change is to place every situation into one of three buckets - the same framework we used for CGT and Negative Gearing.
| Bucket | Situation | What happens |
|---|---|---|
| Bucket 1 ✅ | Your SMSF owns residential property outright - no loan | No change. Hold the property inside your SMSF with no restrictions. |
| Bucket 2 ⏳ | Your SMSF has an existing LRBA on a residential property | Grandfathered. Your loan continues to its natural end. No forced repayment or wind-down. |
| Bucket 3 ⚠️ | You were planning to borrow inside an SMSF to buy residential property | The strategy is no longer available. New residential LRBAs cannot be established from 23 June 2026. |
The grandfathering provisions fully preserve existing arrangements. You are not being forced to sell or refinance. The change only prevents new LRBAs - it does not unwind existing ones.
If your SMSF currently holds a residential property under an LRBA, here is what changes - and what does not.
| Element | What it means for you |
|---|---|
| Loan repayments | Unchanged. Continue as scheduled. |
| Rental income treatment | Unchanged. Taxed at 15% inside the SMSF. |
| Capital gains on eventual sale | Unchanged. CGT concessions inside super still apply. |
| Bare trust structure | Unchanged. The trust deed and structure remain in place for the life of the loan. |
| Refinancing the existing loan | Grey area. Refinancing with a new lender may be treated as a new LRBA. Seek legal advice before proceeding. |
| Adding a new property under the LRBA | Not permitted. Grandfathering applies only to the existing arrangement. |
⚠️ The refinancing risk
If your SMSF has an existing residential LRBA and you are considering refinancing to a lower rate, do not proceed without specific legal advice. Whether a refinance is treated as a 'new' LRBA is not yet settled by the ATO. Acting without clarity could inadvertently breach the new rules and put your fund's grandfathered status at risk.
Sarah's SMSF purchased a two-bedroom unit in Brisbane in 2022 using an LRBA. The fund borrowed $450,000 and the property is now worth $620,000. The loan has 12 years remaining.
| Element | Outcome |
|---|---|
| Position after 23 June 2026 | Fully grandfathered - no change required |
| Rental income | Still taxed at 15% inside the SMSF |
| Capital gain when sold | Still eligible for CGT concessions inside super |
| One risk to watch | Do not refinance without legal advice - grandfathered status could be lost |
James has $280,000 in his SMSF and was planning to borrow $420,000 to purchase a Melbourne townhouse as a long-term investment inside his super.
| Element | Outcome |
|---|---|
| Position after 23 June 2026 | Strategy no longer available - new residential LRBA cannot be established |
| Impact on his SMSF | His $280,000 remains in the fund and can be invested in other asset classes |
| Alternatives worth modelling | Purchase residential property outside super (individually or via trust). Buy commercial property inside SMSF via LRBA (still permitted). Invest SMSF balance in listed property trusts (REITs). |
| Action required | Speak with a property accountant or SMSF adviser to reassess strategy |
It is important to be clear about what has not changed. SMSFs can still borrow to purchase business real property - commercial premises used wholly and exclusively in a business.
| Property type | LRBA status after 23 June 2026 |
|---|---|
| Residential property LRBA (new) | Abolished from 23 June 2026 |
| Existing residential LRBA | Grandfathered - continues to natural end |
| Commercial property LRBA (shop, warehouse, factory used in your business) | Still fully permitted |
| Vacant land for residential development | Treated as residential - new LRBAs not permitted |
| Mixed-use property | Seek specific advice - classification depends on use |
💡 Business owners: your strategy is intact
If you run a business and were planning to use your SMSF to purchase your commercial premises via an LRBA, this strategy is completely unaffected. It remains one of the most tax-effective structures available to business owners - and one worth modelling properly with the right records in place.
Whether you hold residential property inside an SMSF or in your own name, one thing does not change: the quality of your records determines how much tax you pay and how exposed you are at audit time.
The Property Accountant is built for all property investors - tracking cost base, rental income, capital improvements, and CGT positions across your entire portfolio, whether held personally, in a trust, or inside super. With the 1 July 2027 CGT split date approaching, getting your records in order now is the single highest-value thing you can do.
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The new rules are law from 23 June 2026. Here is a clear action plan based on your situation.
| Your situation | What to do now |
|---|---|
| Your SMSF holds residential property outright (no loan) | No immediate action needed on the new rules. Focus on records: ensure your cost base documents, rental income history, and the 1 July 2027 CGT valuation are in order. |
| Your SMSF has an existing residential LRBA | You are grandfathered. Review your bare trust documentation to confirm it is current. Do not refinance without legal advice - your grandfathered status is worth protecting. |
| You were planning to borrow inside an SMSF to buy residential property | That strategy is no longer available. Model alternatives with a property adviser: purchasing outside super, using a commercial LRBA, or redirecting SMSF funds to listed property trusts. |
| You run a business and planned a commercial property LRBA | Unaffected. Proceed as planned - with proper documentation in place from day one. |
| You own investment property outside your SMSF | The CGT changes announced on 12 May 2026 affect you directly. Get your cost base records in order and book your 1 July 2027 valuation. The Property Accountant tracks all of this for you. |
The ability to borrow inside an SMSF for residential property is gone for new arrangements. But the change is not as disruptive as it sounds - existing LRBAs are fully protected, commercial property borrowing is unaffected, and for most investors the bigger issue has always been the same: keeping the records that determine how much tax you pay when you eventually sell.
A spreadsheet records a number. It does not protect a claim. Under the new rules, that difference matters more than ever.
Disclaimer: This article is general information only and does not constitute personal financial, legal, or tax advice. The SMSF borrowing rule changes passed on 23 June 2026 are now law, but detailed application - particularly around refinancing and transitional arrangements - is subject to further ATO guidance. Individual circumstances vary - always speak with a registered tax agent or SMSF specialist before making investment or structural decisions.
