Avoid These SMSF LRBA Structure Mistakes in Eagleby

The structure of a limited recourse borrowing arrangement determines whether your Self-Managed Super Fund can borrow to acquire property.

From approximately 10 August 2026, new LRBAs can only be used to acquire business real property as defined under section 66 of the SIS Act. Residential property no longer qualifies. The ban applies regardless of whether the dwelling is newly constructed or an existing home. SMSFs may still acquire residential property using existing fund assets without borrowing, provided the property is not purchased from a related party and is not occupied by a member or anyone related to a member.

The Date That Matters for Existing Arrangements

The operative date for the residential ban is the date of contract exchange, not settlement. A contract exchanged before approximately 10 August 2026 is protected even if settlement occurs after that date. No action is required by trustees with existing compliant residential LRBAs. These arrangements are grandfathered and may continue under their original terms.

In our experience, fund members in Eagleby who have exchanged contracts on residential investment property before the commencement date should verify that the date is documented and that the arrangement complies with the LRBA conditions that were in place at the time of entry. If you are considering refinancing an existing residential LRBA, the ATO had not published updated guidance as at 2 July 2026 on the circumstances in which refinancing might be treated as a new arrangement subject to the post-commencement rules.

How the LRBA Structure Works

An LRBA requires the asset to be held in a separate holding trust. The SMSF acquires a beneficial interest in the asset and obtains legal ownership after the loan is repaid. If the loan defaults, only the asset held in trust is at risk. Investment returns from the asset flow to the SMSF.

The borrowed money must be used to acquire a single asset, or a collection of identical assets with the same market value that can be treated as a single asset. Expenses such as loan establishment costs and stamp duty may also be covered. Borrowed funds cannot be used to improve an existing asset. The asset cannot be subject to any charge other than under the LRBA.

Consider a fund acquiring a warehouse on a single title in Logan City. The property is leased to an unrelated business and satisfies the business real property definition. The SMSF borrows under an LRBA, with the warehouse held in a bare trust. Rental income flows to the fund and is taxed at 15 percent during accumulation phase or zero percent if the member has commenced a pension. When the loan is repaid, legal title transfers to the SMSF. The lender's recourse in the event of default is limited to the warehouse itself.

Business Real Property After the Ban

Business real property means land and buildings used wholly and exclusively in one or more businesses. Where the property contains a dwelling for private or domestic purposes, it can still qualify if the dwelling occupies no more than 2 hectares and the main use of the whole property is not domestic or private.

Whether a property satisfies the business real property definition depends on its actual use at the time of acquisition. Vacant land not currently used in a business and mixed-use properties where the main use is domestic or private may not qualify. Detailed guidance and examples are set out in SMSFR 2009/1.

For fund members in Eagleby and surrounding areas including Beenleigh and Waterford, commercial property acquired under an LRBA remains an option provided the property is used wholly and exclusively in a business. The business in which the property is used does not need to be carried on by the entity holding the interest in the property. A warehouse leased to a third party or a retail premises leased to an operating business both qualify.

Related Party Leasing and Arm's Length Terms

Business real property leased between the fund and a related party of the fund is excluded from the in-house asset rules. Any such lease must be made on arm's length terms at market value.

The ATO publishes safe harbour interest rates for SMSF LRBAs under PCG 2016/5. These rates are updated annually and apply to both real property and listed securities held under an LRBA. Income from an arrangement that does not meet arm's length terms may be assessed as non-arm's length income and taxed at the highest marginal rate.

In the event of a default, recourse of the lender against the SMSF trustees must be limited to the asset being acquired under the arrangement. A related party may provide a personal guarantee to the lender, but their recourse must also be limited to the asset under the arrangement and not any other SMSF assets.

Division 296 Tax and Total Superannuation Balance

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 of earnings above that threshold.

Outstanding LRBA amounts entered into on or after 1 July 2018 are included in a member's total superannuation balance in certain circumstances, including where the LRBA is with an associate of the fund or where the member has satisfied a condition of release with a nil cashing restriction. This inclusion affects not only Division 296 tax liability but also eligibility for non-concessional contributions and the bring-forward arrangement.

For members approaching or exceeding these thresholds, the decision to use an SMSF loan rather than acquiring property with existing fund assets has broader implications for tax and contribution planning. The outstanding loan balance may push the total superannuation balance above a threshold that would otherwise not be reached.

Contribution Caps and Funding the Deposit

The concessional contributions cap is $32,500 per annum from 1 July 2026. The non-concessional contributions cap is $130,000 per annum. The bring-forward arrangement allows non-concessional contributions of up to $390,000 over three years where the member's total superannuation balance on 30 June of the previous year was below $1.84 million.

Where the balance was between $1.84 million and $1.97 million, the member can contribute up to $260,000 over two years. Where the balance was between $1.97 million and $2.1 million, only the annual cap of $130,000 applies. Where the balance equalled or exceeded $2.1 million, the non-concessional contributions cap is nil.

Fund members in Eagleby looking to use an LRBA for commercial property need sufficient fund assets to meet the deposit requirement, which is typically 30 percent to 35 percent of the property value, plus settlement costs. Where existing fund assets are insufficient, members may need to make additional contributions within the caps available to them. The interaction between contribution caps, total superannuation balance, and Division 296 tax thresholds requires careful planning.

Refinancing and When an Arrangement Ends

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 provides that the residential LRBA prohibition does not apply to maintaining or refinancing a borrowing under an arrangement entered into before the commencement date. As at 2 July 2026, the ATO had not published updated guidance on the circumstances in which a refinancing arrangement might be treated as a new LRBA under the post-commencement rules.

Under the ATO's existing position, a significant change to the terms or conditions of an LRBA ends the arrangement and a new one begins. Circumstances that may end an existing arrangement include refinancing that is inconsistent with the original arrangement, borrowing to acquire an asset not contemplated under the original arrangement, and changes to the ultimate beneficiaries of the arrangement. A new arrangement entered into after the commencement date would be subject to the post-commencement rules.

For members with existing residential LRBAs, this creates uncertainty around what constitutes maintaining or refinancing versus entering a new arrangement. Practical Compliance Guideline PCG 2016/5 sets out arm's length terms for SMSF LRBAs and remains current, but does not address the boundary between refinancing and a new arrangement in the context of the 2026 legislation.

Multiple Titles and the Single Asset Requirement

Multiple real property titles cannot be acquired under a single LRBA. An exception applies where the properties are distinctly identifiable as a single asset, meaning they are identifiable, have equal market value, and are bought and sold together.

Properties on separate titles do not qualify even if substantially similar. Consider a scenario where a fund seeks to acquire two adjoining industrial units in the same complex, each on a separate title. Even if the units are identical in size and value, they cannot be acquired under a single LRBA. Each would require a separate arrangement, or the fund would need to acquire one unit under an LRBA and the other using existing fund assets.

This restriction affects fund members in Logan City looking to acquire multiple commercial properties as part of a diversification strategy. Each property on a separate title requires its own LRBA, its own holding trust, and compliance with the single asset requirement.

Wagstaff Finance works with fund members across Eagleby, Beenleigh, and Waterford to structure SMSF property acquisitions that comply with the LRBA framework. Call one of our team or book an appointment at a time that works for you.

Frequently Asked Questions