Major Changes to SMSF Borrowing: What the 2026 LRBA Reforms Mean for Residential Property Investors

The landscape for Self-Managed Super Funds (SMSFs) has changed significantly.

What You Need to Know at a Glance

✔ The law has changed. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 has now passed Parliament and received Royal Assent.

✔ There is a 45-day transition period. Eligible residential LRBA transactions may still proceed before the new provisions commence, subject to the legislation and individual circumstances.

✔ New residential LRBAs will be prohibited. Once the transition period ends, SMSFs will no longer be able to borrow under a Limited Recourse Borrowing Arrangement to acquire residential property.

✔ Commercial property borrowing remains available. LRBAs can continue to be used to acquire qualifying Business Real Property, provided all requirements of the Superannuation Industry (Supervision) Act 1993 are satisfied.

✔ Existing residential LRBAs are protected. Residential properties already acquired under a compliant LRBA are grandfathered. There is no requirement to unwind existing arrangements or dispose of the property because of these reforms.

✔ SMSFs can still own residential property. The reforms do not prohibit SMSFs from investing in residential real estate—they only restrict borrowing to acquire it. Residential property can still be purchased using the SMSF's own available funds.

✔ Now is the time to review your strategy. Trustees considering an SMSF property acquisition should seek professional advice as soon as possible to understand how the new rules may affect their plans.

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 has now passed both Houses of Parliament and received Royal Assent, making the reforms to the Superannuation Industry (Supervision) Act 1993 (SIS Act) law.

Importantly, the changes do not take effect immediately. The legislation provides a 45-day transition period from the date of Royal Assent, allowing SMSF trustees, lenders, advisers and purchasers a limited opportunity to complete eligible transactions before the new restrictions commence.

Once the 45-day transition period expires, new Limited Recourse Borrowing Arrangements (LRBAs) can no longer be used by SMSFs to acquire residential property. Instead, borrowing under an LRBA will be limited to qualifying Business Real Property, fundamentally changing how SMSFs can leverage property investments.

For trustees, advisers, brokers and property investors, understanding these reforms—and acting within the transition period where appropriate—is essential.

What is an LRBA?

The SIS Act generally prohibits superannuation funds from borrowing money. However, sections 67A and 67B provide an important exception through a Limited Recourse Borrowing Arrangement (LRBA).

An LRBA allows an SMSF to borrow funds to acquire a single asset, subject to strict legislative safeguards, including:

• The asset must be a single acquirable asset.

• The asset must be held on trust until the borrowing has been repaid.

• The lender's rights are limited to the asset acquired.

• The SMSF holds the beneficial interest in the asset throughout the arrangement.

• Once the loan has been repaid, legal ownership transfers to the SMSF.

For many years, these provisions have enabled SMSFs to acquire both residential investment properties and commercial properties using borrowed funds.

What Has Changed?

The 2026 reforms do not abolish LRBAs.

Instead, they narrow the types of real property that can be acquired using borrowed funds.

Under the amended legislation, where an SMSF borrows to acquire real property under an LRBA, the property must qualify as Business Real Property under the SIS Act.

This means that new LRBAs can no longer be used to purchase residential investment property.

From the commencement date:

Permitted under an LRBA

• Commercial offices

• Warehouses

• Factories

• Medical suites

• Retail premises

• Industrial property

• Business real property leased to a related business (where all legislative requirements are satisfied)

No longer permitted under an LRBA

• Residential houses

• Apartments

• Townhouses

• Units

• Vacant residential land intended for residential investment

Existing Residential LRBAs Are Protected

One of the most important aspects of the reforms is that existing residential borrowing arrangements are grandfathered.

If your SMSF already owns residential property under a compliant LRBA:

• Your loan remains valid.

• Repayments continue as normal.

• There is no requirement to refinance.

• There is no requirement to sell the property simply because of the legislative change.

The reforms apply to new borrowing arrangements after the commencement date, not to existing compliant structures.

Can an SMSF Still Buy Residential Property?

Yes.

The new legislation does not prevent SMSFs from owning residential property.

Instead, it changes how residential property can be acquired.

An SMSF may still purchase residential investment property provided it uses its own available funds rather than borrowed money.

In other words:

✔ SMSF purchasing residential property with cash – Still permitted

✘ SMSF borrowing under an LRBA to purchase residential property – No longer permitted after the commencement date

Why Were These Changes Introduced?

The Government's stated objective is to reduce leveraged investment by SMSFs in the residential housing market while preserving borrowing for genuine business assets.

Commercial property continues to play an important role for many small business owners who acquire their business premises through their SMSF. The reforms preserve this long-standing strategy while removing the ability to leverage residential property acquisitions through superannuation.

What This Means for Trustees and Advisers

The amendments reinforce the importance of obtaining professional advice before establishing or restructuring an SMSF borrowing arrangement.

Trustees considering property investment should review:

• Whether the intended property qualifies as Business Real Property.

• Whether borrowing remains available under the amended legislation.

• Whether a cash purchase is a more appropriate strategy.

• The long-term investment objectives of the SMSF.

For accountants, financial advisers, mortgage brokers and legal practitioners, these reforms represent one of the most significant changes to SMSF borrowing since LRBAs were introduced.

Our Recommendation

With the legislation now enacted and the 45-day transition period underway, SMSF trustees who have been considering purchasing residential investment property using a Limited Recourse Borrowing Arrangement should review their plans immediately.

If you are already in the process of establishing an SMSF, obtaining finance or negotiating a property purchase, now is the time to speak with your accountant, financial adviser, solicitor and lender. Once the new provisions commence, new residential LRBAs will no longer be available.

However, the commencement period should not encourage rushed decisions. An SMSF property investment should always align with the fund's investment strategy, satisfy the sole purpose test and support the members' long-term retirement objectives.

For trustees whose plans extend beyond the commencement date, commercial property and other qualifying Business Real Property will continue to provide opportunities to utilise Limited Recourse Borrowing Arrangements. Depending on your circumstances, alternative investment strategies or purchasing residential property outright using existing SMSF funds may also remain appropriate.

The transition period provides an opportunity to review your plans, but it is also a reminder that the rules have fundamentally changed. Obtaining professional advice before committing to any borrowing or property acquisition has never been more important.

Final Thoughts

The 2026 amendments do not signal the end of SMSF property investing—but they do represent the most significant reform to SMSF borrowing in almost two decades.

Borrowing through an SMSF remains available for qualifying Business Real Property, while new residential property acquisitions using Limited Recourse Borrowing Arrangements will cease once the 45-day transition period expires.

Existing residential LRBAs remain protected, SMSFs can still own residential property without borrowing, and commercial property strategies continue to be available where they satisfy the requirements of the SIS Act.

With the legislation now in force and the commencement date fast approaching, trustees and advisers should review any proposed property acquisitions to ensure they remain compliant and aligned with the amended law.

If you are considering purchasing property through your SMSF or would like to understand how these reforms may affect your investment strategy, seek professional advice early. Careful planning today can help avoid costly restructuring or missed opportunities once the new rules commence.