Proven tips to purchase an apartment with your SMSF

SMSF Apartment Purchases After August 2026

Self-Managed Super Funds can no longer use borrowed funds to acquire apartments. From 10 August 2026, LRBAs entered into to purchase real property can only be used to acquire business real property. This means residential apartments fall outside the scope of permitted borrowing arrangements for SMSFs established from that date forward.

An SMSF can still own an apartment, but only through outright purchase without borrowing. This restriction does not prohibit SMSFs from owning or acquiring residential property. Where a Toowoomba-based fund has sufficient cash reserves or can consolidate multiple member balances, purchasing an apartment in areas like the CBD redevelopment zone or Middle Ridge without debt remains possible. The limitation applies specifically to Limited Recourse Borrowing Arrangements involving residential real property.

Transitional Protection for Contracts Exchanged Before 10 August 2026

The changes do not apply where an SMSF exchanges a binding contract to acquire real property before 10 August 2026. Consider a scenario where trustees signed a contract to purchase a two-bedroom apartment in the Grand Central precinct on 5 August 2026 but did not settle until September. That arrangement remains valid and the LRBA can proceed as originally structured, even though settlement occurred after the commencement date.

This applies even if the contract is settled or the LRBA is entered into on or after 10 August 2026. The binding contract date controls the treatment, not the settlement or loan drawdown date. Minor variations to the contract terms will not typically affect this protection, though significant changes that alter fundamental terms may result in the arrangement being treated as new.

Refinancing Existing Apartment LRBAs

Funds holding residential apartment LRBAs established before 10 August 2026 retain full refinancing rights. The changes commencing 10 August 2026 do not impact the refinancing of arrangements existing prior to that date. The ATO considers refinancing an LRBA to mean entering into a new loan contract for the same asset, with the same or a new lender.

Consider an SMSF that borrowed to purchase an apartment in Toowoomba's Wilsonton development in early 2024. That fund can refinance to secure a lower variable rate or switch lenders without triggering the new restrictions. The refinanced loan must relate to the same apartment held in the original bare trust, and the limited recourse structure must remain intact. Any refinancing involving a related party lender must continue to meet arm's length interest rate requirements under PCG 2016/5.

When Existing Arrangements Are Considered to End

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 terminate an existing arrangement include borrowing to acquire an asset not contemplated under the original arrangement or changes to the ultimate beneficiaries.

A fund that refinances its apartment LRBA and simultaneously attempts to borrow additional funds to acquire a second property would likely trigger a new arrangement. A new arrangement entered into on or after 10 August 2026 that involves residential property would be subject to the post-commencement rules and could not proceed. Trustees should obtain specialist advice before making any structural changes to existing residential LRBAs to avoid inadvertently ending the arrangement.

Commercial Property Remains an Option for Borrowing

Business real property provides an alternative path for SMSFs seeking to use borrowed funds. LRBAs for commercial property that satisfies the definition of business real property under section 66 of the SIS Act are not affected by the changes commencing 10 August 2026. Office suites, retail spaces, warehouses, and industrial units remain eligible where they meet the definition requirements.

Business real property generally means land and buildings used wholly and exclusively in one or more businesses. A commercial strata unit in a Toowoomba CBD office building leased to a law firm or accounting practice would typically qualify. The business conducted on the property does not need to be operated by the SMSF itself. Trustees considering commercial loans should verify the property's actual use satisfies the definition at the time of acquisition, as marketing descriptions alone do not determine compliance.

Capital Gains Tax Treatment on Disposal

A complying SMSF is taxed at a concessional rate of 15 percent on its assessable income, including net capital gains. Where an apartment has been held for at least 12 months, a one-third CGT discount may apply, which can produce a maximum effective rate of 10 percent on the discounted gain.

The actual tax outcome depends on multiple factors including acquisition costs, selling costs, capital improvements, and whether the fund has carried-forward capital losses. A fund in pension phase may receive exempt current pension income depending on whether assets are segregated and the method used to calculate the exemption. The outcome is not automatic and varies based on each fund's specific circumstances. Trustees planning to sell an investment apartment should work with their SMSF accountant to model the tax impact based on their fund's position.

Division 296 Tax Implications for High Balance Members

From 1 July 2026, where a member's total superannuation balance (TSB) at the end of the financial year exceeds the large super balance threshold (LSBT) of $3 million, Division 296 tax of 15 percent applies to the proportion of earnings attributable to the amount above the LSBT. Where the TSB exceeds the very large super balance threshold (VLSBT) of $10 million, an additional 10 percent Division 296 tax applies to the proportion of earnings above that threshold.

Rental income and realised capital gains from an apartment contribute to the Division 296 calculation. 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. For members with balances approaching or exceeding these thresholds, rental yield and the timing of property sales become relevant considerations in managing tax exposure. LRBA amounts are disregarded when calculating a member's TSB for Division 296 tax purposes. Members considering their broader superannuation strategy may wish to review SMSF loans in the context of these thresholds.

Contribution Strategies for Cash Purchases

Where borrowing is not available, building sufficient cash within the fund requires planning around contribution caps. 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 TSB on 30 June of the previous year was below $1.84 million.

A Toowoomba couple each aged 58 with combined SMSF balances of $1.6 million could use the bring-forward rule to contribute up to $780,000 in non-concessional contributions over three years, subject to their individual balance positions. Combined with existing fund assets and the sale of other investments, this may provide sufficient liquidity to acquire an apartment without debt. This approach requires careful sequencing to avoid breaching contribution caps or triggering excess contributions tax. Members approaching these decisions should obtain advice from both an SMSF mortgage broker and their SMSF administrator to confirm their available capacity.

Sole Purpose Test Compliance

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. An apartment owned by an SMSF cannot be occupied by a member or any related party of a member, regardless of whether the property was purchased with borrowed funds or cash.

This restriction applies even where market rent is paid. A Toowoomba fund that owns an apartment in Rangeville cannot lease it to the member's adult child, parent, or business partner. The property must be leased to an unrelated third party on arm's length terms. Rental income must reflect market value and be properly documented. Trustees should obtain an independent rental appraisal before setting the lease rate and ensure the tenancy agreement reflects standard commercial terms. Compliance with the sole purpose test is ongoing and must be maintained throughout the period the property is held.

Call one of our team or book an appointment at a time that works for you to discuss how recent legislative changes affect your SMSF property strategy and explore alternative structures that align with your retirement planning objectives.

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