SMSF property borrowing enters a new era: What the reforms mean for property investors

The landscape for property investment through self-managed superannuation funds (SMSFs) has changed.

Following the latest reforms to limited recourse borrowing arrangements (LRBAs). SMSFs are now restricted from entering into new LRBAs to acquire real property unless that property qualifies as business real property (BRP) under the Superannuation Industry (Supervision) Act 1993 (SIS Act).

Much of the discussion has understandably focused on the effective ban on new SMSF borrowings for residential property.

However, the reforms have another important consequence: understanding whether a property qualifies as business real property has become increasingly important.

For SMSF trustees and business owners considering future property acquisitions, this distinction will be critical.

The new restriction on residential property LRBAs

SMSFs are generally prohibited from borrowing money under section 67 of the SIS Act. LRBAs under sections 67A and 67B provide an important exception, allowing an SMSF to borrow to acquire an asset where the legislative conditions are satisfied.

The latest restrictions are contained in Schedule 5 of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, which received Royal Assent on 26 June 2026.

The practical result is that SMSFs can no longer enter into new LRBAs to acquire ordinary residential investment property.

Importantly, this does not prevent an SMSF from investing in residential property altogether. Subject to the usual superannuation rules, an SMSF can still acquire residential property without borrowing.

The change specifically narrows the circumstances in which the LRBA exception can be used to acquire real property. Trustees should therefore ensure current or proposed arrangements are reviewed in light of the updated rules, taking into account their timing, structure and particular circumstances.

How does the new restriction actually work?

While commonly described as a ban on SMSF LRBAs for residential property, the legislative mechanism is more nuanced.
Schedule 5 amends subsection 67A(2) of the SIS Act by introducing a new condition for an “acquirable asset”. New paragraph 67A(2)(c) provides that:

“for an asset that is real property—the asset is business real property (within the meaning of section 66 of this Act).”

This distinction is important.

Rather than simply prohibiting property labelled “residential”, the law requires that, where the acquirable asset is real property, it must satisfy the definition of business real property in section 66 of the SIS Act.

For trustees contemplating a new property LRBA, the key technical question therefore becomes:

Does the property satisfy the statutory definition of business real property?

Unpacking business real property

Business real property (BRP) is not a new concept in the SMSF world.

It has long been relevant to specific concessions under the SIS Act, including circumstances in which an SMSF may acquire business real property from a related party. It is also particularly relevant to business owners who hold business premises within their SMSF and lease those premises to their operating business.

BRP now has an additional role: it determines whether real property can qualify as an acquirable asset under a new LRBA.

Broadly, subsection 66(5) of the SIS Act requires an eligible interest in real property where:

“the real property is used wholly and exclusively in one or more businesses.”

Those words, “wholly and exclusively”, are critical.

The ATO's detailed interpretation is contained in SMSFR 2009/1, which makes clear that whether a property satisfies the test depends on its actual use and the particular facts and circumstances.

A property does not necessarily satisfy the BRP definition simply because it is commercially zoned, marketed as commercial property, regarded by a lender as commercial security, or produces rental income.

What about mixed-use properties?

Mixed-use properties require particular care.

Consider, for example, a property comprising commercial premises downstairs and residential accommodation upstairs. It can be tempting to assume that any residential component automatically prevents the property from qualifying.

That is not necessarily the case.

The ATO’s interpretation in SMSFR 2009/1 confirms that the “wholly and exclusively” test is applied having regard to the actual use of the property as a whole. Incidental or minor non-business use will not necessarily prevent a property from satisfying the definition. However, where non-business use is more than incidental, the requirement will not be met.

There are also specific statutory rules that may apply in limited circumstances, including certain primary production properties where a dwelling is used for private or domestic purposes, provided the relevant conditions in the SIS Act are satisfied.

The key point is that mixed use does not automatically exclude a property from being business real property. Equally, describing a property as “commercial” does not, of itself, establish that it qualifies.

Ultimately, the analysis relies on the facts and the actual use of the property. For trustees contemplating an LRBA, the BRP assessment should therefore be undertaken before committing to the acquisition.

Commercial property LRBAs remain available

While residential LRBAs have dominated the discussion of the reform, LRBAs involving qualifying business real property remain available.

For some business owners, acquiring business premises through an SMSF can continue to form part of a broader retirement and business planning strategy.

A common example is an SMSF acquiring commercial premises and leasing them to a related operating business, provided the BRP and other SIS Act requirements are satisfied, and the arrangement is conducted on arm's-length terms.

Rather than paying rent to an unrelated landlord, a business may occupy premises held as a long-term investment of the SMSF. Ownership can also provide greater certainty of tenure.

However, the property remains an investment of members' retirement savings. Trustees need to consider the fund's investment strategy, diversification, liquidity, cash flow and risk, as well as its capacity to service the borrowing.

What does commercial SMSF lending look like?

Commercial property finance can operate differently from traditional residential lending, with terms depending on the lender, property, location, loan-to-value ratio (LVR), SMSF financial position and loan structure.

Based on discussions with specialist SMSF finance professionals, third-party commercial SMSF lending may include:

• LVRs of up to approximately 80% for some metropolitan and major regional commercial properties, with lower limits potentially applying elsewhere;
• interest rates varying according to factors including LVR, security and loan structure;
• principal-and-interest and interest-only options; and
• lending across properties including warehouses, offices, factories and retail premises.

These are general market observations only. Lending policies, pricing and credit appetite vary between lenders and can change over time.

Trustees should therefore understand both the superannuation law requirements and the financing available for the particular asset before proceeding.

Seek advice before committing to the acquisition

One of the most important practical consequences of the reform is that specialist SMSF advice needs to occur at the outset of the property acquisition process. Ideally, the SMSF, tax, legal and finance considerations should be worked through before the SMSF commits to the acquisition. Once a transaction is underway, opportunities to address structural issues may be more limited.

What the reforms mean for SMSF property borrowing

The reforms do not mark the end of property investment through SMSFs, nor the end of SMSF borrowing. They do, however, fundamentally change the landscape for future property LRBAs.

For business owners, acquiring qualifying business premises through an SMSF can remain a valuable long-term strategy where appropriate to the fund and its members. However, the new rules reinforce an important principle: determine whether the property and proposed structure comply with the SMSF rules before committing to the transaction, rather than trying to solve the technical issues afterwards.

How BDO can help

Acquiring property through an SMSF requires careful consideration of the superannuation, tax, legal and financing implications. BDO's superannuation and SMSF specialists work with trustees and business owners to assess proposed acquisitions, navigate complex compliance requirements and identify potential issues before a transaction proceeds.

If you are considering acquiring property through your SMSF, contact a BDO superannuation and SMSF specialist in your local office.

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