SMSF borrowing: how LRBAs work, and what changed on 10 August 2026

The starting point is simple: section 67 of the SIS Act says an SMSF trustee must not borrow money. Section 67A is the exception. It allows a limited recourse borrowing arrangement, and almost every SMSF property loan in Australia is built on it.

On 10 August 2026 that exception narrowed. For real property, a new LRBA now has to be for business real property. This guide explains how an LRBA works, exactly what the change does and doesn't do, how related-party loans are kept at arm's length, and the costs and traps. It's general information. Whether your fund should borrow is a financial product decision, and a licensed financial adviser should make that recommendation. The loan, bare trust and security documents are for your solicitor and lender. We do the tax, accounting and compliance work and coordinate with both.

What is an LRBA and how does it work?

An LRBA lets the fund borrow to buy one asset, while keeping the rest of the fund out of the lender's reach. The conditions in section 67A, in plain English:

1. The money is used to buy a single acquirable asset, or a collection of identical assets with the same market value (such as a parcel of the same listed shares). Borrowed money can also pay costs of the purchase, such as stamp duty and legal fees, and repairs and maintenance, but not improvements.
2. The asset is held on trust (usually called a bare trust or holding trust) so that the fund has the beneficial interest, and the right to take legal title once the loan is paid off.
3. The lender's rights against the fund are limited to rights relating to that asset. If the loan defaults, the lender can take the asset, and nothing else in the fund.
4. The asset can't be subject to any charge other than the lender's.

The people and paperwork involved

The steps, in order

1. Confirm the fund's trust deed allows borrowing and the investment strategy supports it.
2. Confirm the asset is allowed. For real property under a new LRBA, it must be business real property.
3. Set up the bare trust and its trustee company before signing the contract.
4. Sign the contract in the name the lender and your solicitor specify (usually the bare trustee).
5. Pay the deposit from the SMSF's own bank account.
6. Settle, with the loan made to the SMSF trustee and the title held by the bare trustee.
7. Collect rent into the fund and make repayments from the fund.
8. Once the loan is repaid, legal title can be transferred from the bare trustee to the fund. Duty on that transfer depends on the state.

What changed for SMSF borrowing on 10 August 2026?

Here's what the law says, precisely, because press summaries of it have often been wrong.

• The law. Schedule 5 of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (Act No. 49 of 2026, Royal Assent 26 June 2026) inserted paragraph 67A(2)(c) into the SIS Act.
• The rule. Where the acquirable asset under an LRBA is real property, it must be business real property within the meaning of section 66. Business real property is land and buildings used wholly and exclusively in one or more businesses.
• The start date. The change applies to LRBAs entered into on or after 10 August 2026.
• Ongoing, and for every lender. The property must be business real property when the LRBA is entered into, and should be treated as needing to stay that way for the life of the loan. The lender's identity doesn't matter: bank, non-bank and related-party loans are all caught. The ATO released guidance on the change on 28 July 2026; check it for the latest position before relying on any one reading.

What it doesn't do

• It doesn't ban SMSFs owning residential property. A fund can still buy residential property outright with its own money.
• It doesn't affect LRBAs over other assets, such as listed shares or units.
• It doesn't create a new penalty. An LRBA that doesn't meet the new condition falls outside the section 67A exception, so the fund has breached the general borrowing ban in section 67. That carries the usual consequences: an auditor contravention report, possible rectification or administrative penalties, and in serious cases the fund being made non-complying.
• It doesn't change section 66's definition of business real property. The existing definition and the ATO's ruling SMSFR 2009/1 apply.

Is my loan grandfathered?

Watch out: Because business real property must stay that way for the whole loan, a change of use halfway through, such as converting an upstairs office into a flat, can turn a compliant loan into a breach. Plan use changes with us before they happen.

Can my SMSF borrow from me or a related party?

Yes, provided the loan is on arm's length terms. If it isn't, the income and capital gains from the property can be taxed at 45% as non-arm's length income (see our NALI and NALE guide).

The ATO's Practical Compliance Guideline PCG 2016/5 sets out "safe harbour" terms. If a related-party LRBA follows them, the ATO accepts it is consistent with an arm's length dealing.

The safe harbour isn't the only way to show arm's length terms. A related-party loan can mirror a real commercial loan the fund could have obtained, with evidence. But the safe harbour is the simplest defence at audit, so most of our clients use it.

The rate is reset each year. Check that your loan's rate (and repayments) have been updated for each financial year.

What can and can't you do with a property under an LRBA?

The "single acquirable asset" rule follows the property for as long as the loan is in place. The ATO's view is set out in SMSFR 2012/1.

If major works are the plan, the alternatives are to pay off the loan first, buy outright, or use a debt-free Regulation 13.22C unit trust, where these replacement-asset limits don't apply.

What does SMSF borrowing cost?

More than an ordinary investment loan, and the costs matter more in a smaller fund.

• Set-up: bare trust deed, bare trustee company, legal review of the loan, and the lender's fees.
• Interest: SMSF loans generally cost more than standard investment loans, and fewer lenders offer them.
• Ongoing: an extra company to keep on the ASIC register, the bare trust's records, and more audit work.
• Liquidity: lenders usually want a deposit and a cash buffer well beyond the minimum, so the fund can keep paying if the tenant leaves.

Interest and borrowing costs are generally deductible to the fund against the property's income. A loss stays in the fund and offsets the fund's other income. It doesn't flow through to your personal return. Our loan calculator agent works out repayments and whether the fund's income can carry the debt; your accountant checks the result before you rely on it.

Worked example: geared business premises

Example only, with round numbers. Say an SMSF wants a $1,000,000 warehouse to lease to the members' company at $70,000 a year. The fund has $450,000. It borrows $650,000 from a related party on safe harbour terms for 2026–27: 9.35% variable, 15 years, monthly principal and interest.

The figures show why the cash flow test comes first. Here, rent alone doesn't cover the repayments, so the fund relies on members' contributions. If a member retires and starts a pension, the fund has to pay minimum pension amounts too. Your financial adviser should test this against each member's plans before anyone signs.

Which SMSF borrowing mistakes cause the most trouble?

1. Signing the contract before the bare trust exists, or in the wrong name.
2. Assuming a related-party loan isn't caught by the 10 August 2026 change. It is.
3. A related-party loan at a low or nil rate, or with repayments that are skipped "until the fund has the cash".
4. Not updating the safe harbour rate each year.
5. Improving the property with borrowed money, or making changes that create a different asset.
6. Mixed-use property bought with a new LRBA, where part of it is residential.
7. Change of use partway through the loan, so the property stops being business real property.
8. Lender security over other fund assets, which breaks the limited recourse requirement.
9. Forgetting the transfer of title from the bare trustee once the loan is paid off.

How BPAG helps with SMSF borrowing

We prepare the fund's accounts and annual return, coordinate the independent audit with an approved SMSF auditor, and check the LRBA every year.

• Before you borrow, our super and SMSF agent works through whether the asset is allowed under the 10 August 2026 rule, whether a contract is grandfathered, and whether the loan terms meet the safe harbour. Your accountant reviews it and gives you a written answer.
• Cash flow, using our loan calculator agent to model repayments against rent, contributions and future pension payments; your accountant checks the model.
• Each year, we confirm repayments were made on time and at the right rate, the property is still business real property, the bare trust records are in order, and the loan balance is reflected correctly in members' total super balances.

The agents draft. Qualified accountants review and sign off, and nothing reaches you, the auditor or the ATO without a person approving it. Loan and bare trust documents are prepared by a solicitor, and the decision to borrow in super is a recommendation for a licensed financial adviser. We work alongside both.

What to send us

• The contract of sale, with the exchange date, or a draft
• The loan offer, or the proposed related-party loan agreement
• The bare trust deed and the bare trustee's company details
• How the property is used now and will be used, and who the tenant is
• The fund's latest financial statements and investment strategy

More on the property rules in our SMSF property guide and business real property guide. For ongoing compliance, see our SMSF accounting and audit service.

General information only, current as at 18 October 2026. It is not personal tax, legal or financial product advice and doesn't take your circumstances into account. Talk to us before you act. Where a recommendation needs a licensed financial adviser or a solicitor, we work alongside them.