The rules governing property purchases through a Self Managed Super Fund (SMSF) using borrowed money have changed, restricting the types of property that can be acquired under new limited recourse borrowing arrangements.

For SMSF trustees considering property, the distinction between residential and commercial property isn't necessarily enough to determine whether a proposed purchase qualifies.

The way the property is used can also matter.

How does SMSF borrowing work?

SMSFs are generally prohibited from borrowing money, but there are limited exceptions.

One is a limited recourse borrowing arrangement (LRBA). Under an LRBA, an SMSF can borrow to acquire a single eligible asset, with the asset generally held in a separate holding trust while the loan is being repaid.

The lender's rights are generally limited to the asset acquired under the arrangement if the SMSF defaults.

Property has been one of the most common assets acquired by SMSFs using LRBAs.

What changed in 2026?

New restrictions now apply where an SMSF uses an LRBA to purchase property.

Under the changed rules, property acquired through a new LRBA must meet the requirements for business real property.

The legislation became law on 26 June 2026 and included a 45-day transitional period ending on 10 August 2026.

That transitional period has now passed, making the new requirements particularly relevant to trustees considering entering into an LRBA for a property purchase.

What is business real property?

Broadly, business real property is real property used wholly and exclusively in one or more businesses, subject to the relevant superannuation rules and exceptions.

This can create outcomes that aren't immediately obvious.

For example, a property originally designed as a residence may potentially satisfy the definition if it is used wholly and exclusively for business purposes.

The source material provides the example of a medical practice operating from a residentially designed terrace dwelling.

Conversely, a property that appears commercial may not necessarily satisfy the test if it includes a significant non-business use.

A mixed-use residential and retail property held on a single title is one example where further assessment may be required.

Existing arrangements may be treated differently

The changes don't automatically require existing LRBAs over non-business real property to be unwound.

According to the transitional rules outlined in the legislation, existing eligible arrangements can continue.

Existing arrangements may also be able to be refinanced, subject to the requirements applying to the arrangement and the availability and approval of finance.

The distinction between an existing arrangement and a new borrowing arrangement is therefore important.

Trustees should seek advice before refinancing or materially changing an existing LRBA rather than assuming the original treatment will automatically continue.

LRBAs remain subject to other SMSF rules

Satisfying the business real property requirement is only one part of establishing an appropriate SMSF borrowing arrangement.

The broader LRBA rules continue to apply.

For example, borrowed money under an LRBA generally needs to be used to acquire a single acquirable asset. There are also restrictions around using borrowed money to improve that asset.

The ATO notes that money from other sources may be used for improvements in some circumstances, but an improvement cannot change the asset so significantly that it becomes a different asset for LRBA purposes.

SMSF investment, related-party and arm's-length requirements may also need to be considered depending on the arrangement.

Property suitability and SMSF suitability are different questions

A property meeting the technical requirements for an LRBA doesn't necessarily mean it is an appropriate investment for a particular SMSF.

Trustees still need to consider the fund's investment strategy, diversification, liquidity, expected returns, expenses and ability to meet member benefits as they fall due.

Borrowing can also increase financial risk because the fund remains responsible for loan repayments while property values, rental income and interest rates can change.

If you're considering property as part of your broader financial and retirement strategy, it is worth considering the investment decision separately from whether the transaction can technically be structured through an SMSF.

Get advice before signing a property contract

SMSF property transactions can involve superannuation, tax, legal, lending and investment considerations.

Correcting a structure after a property contract has been signed can be much harder than establishing the appropriate arrangement beforehand.

Trustees considering an LRBA should therefore obtain appropriate advice before entering into the property transaction or loan arrangement.