Top tips to buy investment property with your super

Recent legislative changes have reshaped how Self-Managed Super Funds can borrow to acquire property, and the distinction between commercial and residential assets now carries substantial weight.

If you hold your retirement savings in an SMSF and have been considering borrowing to acquire an investment property, understanding which property types remain available under a Limited Recourse Borrowing Arrangement and how the new rules apply will determine whether your strategy remains viable.

What changed on 10 August 2026 for SMSF property borrowing

SMSFs can no longer enter into new Limited Recourse Borrowing Arrangements to purchase residential property. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 restricted real property LRBAs to business real property only, effective from 10 August 2026. This does not prohibit SMSFs from owning residential property outright or holding existing residential LRBAs entered into before that date. The restriction applies only to new borrowing arrangements for residential assets.

Consider a Patterson Lakes SMSF trustee who exchanged contracts on a residential unit in July but did not settle until September. That arrangement remains protected under the transitional provisions because the binding contract was signed before the commencement date. However, an SMSF trustee looking to borrow for a similar residential property after 10 August would not be permitted to proceed under an LRBA.

If you are interested in purchasing an investment property without borrowing, you can still do so through your SMSF, provided the property is not acquired from a related party and is not occupied by a fund member or anyone connected to a member.

How commercial property LRBAs still work under the new rules

Commercial property loans through an SMSF remain available and unaffected by the recent changes. Business real property, as defined under section 66 of the SIS Act, means land and buildings used wholly and exclusively in one or more businesses. The business does not need to be operated by the SMSF itself. Whether a property qualifies depends on its actual use at the time of acquisition, not how it is marketed or zoned.

A warehouse leased to an operating business, a retail shopfront occupied by a tenant conducting trade, or an office suite used for professional services would typically satisfy the definition. A property marketed as commercial but sitting vacant or used for storage by a fund member may not.

An SMSF holding a $600,000 commercial unit in the Cheltenham industrial precinct and leasing it to an unrelated manufacturing business at $36,000 per annum would meet the business real property definition. The rental income would be taxed at 15 percent in accumulation phase, and the property could be acquired under an LRBA with a loan-to-value ratio typically between 60 and 70 percent, depending on the lender and the SMSF's financial position.

If that same unit were later leased to a related party of the fund, the lease must be made on arm's length terms at market rent to avoid breaching the in-house asset rules. Related party leasing of business real property is permitted, but the terms must reflect what an independent tenant would pay in the open market.

Loan structure and holding trust requirements for an SMSF LRBA

The borrowed funds must be used to acquire a single asset or a collection of identical assets with the same market value. Under an LRBA, the property is held in a separate bare trust, and the SMSF acquires a beneficial interest in that asset. Legal title transfers to the SMSF once the loan is repaid. If the loan defaults, the lender's recourse is limited to the asset held in the trust and does not extend to other SMSF assets.

A discretionary trust cannot be used as the holding trust. The SMSF trustee must have the right to acquire legal ownership of the asset after making one or more payments. The asset cannot be subject to any charge other than under the LRBA, and borrowed funds cannot be used to improve an existing asset. This means you cannot draw down additional funds from the loan to renovate or extend the property once the LRBA is in place.

Deposit size, loan-to-value ratios, and borrowing capacity for SMSF loans

Most lenders offering SMSF loans will lend up to 70 percent of the property's value for commercial assets, though some may cap this at 60 or 65 percent depending on the property type and location. This means the SMSF must hold sufficient cash or liquid assets to cover the deposit, stamp duty, legal fees, and loan establishment costs.

An SMSF purchasing a commercial property will need between 30 and 40 percent of the acquisition cost available in cash after accounting for settlement expenses. Borrowing capacity is assessed on the rental income the property is expected to generate, not on the members' personal income. The property must be able to service the loan from its own cash flow, and lenders will apply a rental buffer and interest rate buffer when assessing serviceability.

For Patterson Lakes residents with an SMSF holding a balance sufficient to cover the deposit and costs, working with an SMSF mortgage broker allows you to compare lenders and structure the loan in a way that meets both the lender's requirements and the compliance obligations under the SIS Act.

Tax treatment of rental income and capital gains in your SMSF

Rental income earned by the SMSF is taxed at 15 percent during the accumulation phase. Where the SMSF holds the property to support a retirement-phase income stream, rental income may be exempt from tax as exempt current pension income, provided the fund's assets are fully segregated or an actuarial certificate supports the proportionate method.

A capital gain on disposal is also taxed at 15 percent in accumulation phase, with a one-third discount available where the property has been held for at least 12 months. This produces a maximum effective rate of 10 percent on the discounted gain. Where the property supports a pension and the fund's assets are fully segregated at all times during the income year, the capital gain is disregarded entirely.

If the SMSF uses the proportionate method, only the exempt proportion of the capital gain is disregarded, as determined by an actuarial certificate. The actual tax outcome depends on the property's cost base, selling costs, capital improvements, and the fund's overall tax position for that year.

How Division 296 tax applies to SMSF property from 1 July 2026

Where a member's total superannuation balance exceeds $3 million at the end of the financial year, Division 296 tax of 15 percent applies to the proportion of earnings attributable to the amount above that threshold. An additional 10 percent applies to the proportion above $10 million. For SMSF purposes, Division 296 fund earnings are based on an adjusted amount of the fund's taxable income.

A capital gain is only included in the Division 296 calculation if it is realised through a CGT event. 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. Rental income and realised capital gains may contribute to the calculation. LRBA amounts are disregarded when calculating a member's total superannuation balance for Division 296 tax purposes.

SMSFs were able to elect to adjust the cost base of CGT assets to market value as at 30 June 2026 for Division 296 purposes. This election recognises accrued value prior to the commencement of the new tax and applies to all CGT assets held directly by the SMSF at that date. The election could not be revoked and had to be made by the due date of the 2026-27 SMSF annual return.

Refinancing an existing SMSF loan after the August changes

If your SMSF holds a residential property under an LRBA that was entered into before 10 August 2026, you can refinance that loan to another lender without the refinanced arrangement being subject to the new rules. The ATO considers refinancing to mean entering into a new loan contract for the same asset, with the same or a new lender.

A significant change to the terms or conditions of an LRBA may end the existing arrangement and trigger a new one. Circumstances that could cause this include refinancing that is inconsistent with the original arrangement, borrowing to acquire an asset not contemplated under the original arrangement, or changes to the ultimate beneficiaries. A new arrangement entered into after 10 August that involves residential property would be subject to the post-commencement rules and could not proceed.

Commercial LRBA refinancing remains unaffected by the legislative changes. Compliance conditions continue to apply, including that the refinanced loan must relate to the same single asset, maintain the limited recourse character, and meet arm's length terms consistent with the ATO's safe harbour interest rates published under Practical Compliance Guideline PCG 2016/5.

Meeting the sole purpose test and avoiding related party pitfalls

Every SMSF investment, including property held under an LRBA, must be maintained solely to provide retirement benefits to members. Any decision that gives members or related parties a present-day benefit may contravene section 62 of the SIS Act. This includes allowing a member to use the property, leasing it to a related party at below-market rent, or selecting a property based on personal preference rather than investment merit.

Business real property leased to a related party is excluded from the in-house asset rules, but the lease must be made on arm's length terms. This means the rent charged must reflect what an independent tenant would pay, and the lease terms must be documented and enforceable. The ATO applies scrutiny to related party arrangements, and failure to meet arm's length terms may result in income being taxed as non-arm's length income at 45 percent.

If you are considering whether a property qualifies as business real property or whether a related party lease is appropriately structured, seek advice from a licensed SMSF specialist before proceeding. The rules are technical, and the consequences of a misstep can be significant.

Purchasing investment property through your SMSF remains a viable strategy where the property is commercial in nature and the fund has sufficient liquidity to meet deposit and borrowing requirements. The recent legislative changes have narrowed the scope of what can be acquired under an LRBA, but they have not closed the door entirely. Call one of our team or book an appointment at a time that works for you.

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