SMSF Investment Property Loans: Rules, Costs and Risks

An SMSF can only use a Limited Recourse Borrowing Arrangement to buy real property that is business real property if the LRBA is entered into on or after 10 August 2026, unless a binding contract to acquire the property was exchanged before that date. For investors in Narre Warren North and Narre Warren South, that rule decides which properties your fund can borrow for.

This article covers the rule, how the loan structure works, and what the repayments and tax can look like. Figures and rules are current as at 4 November 2026 and may change.

Can an SMSF Still Borrow to Buy a Residential Investment Property?

Only if the property is business real property, or if the fund exchanged a binding contract or entered the loan before 10 August 2026. A standard rental house or unit that is not wholly and exclusively used in a business can no longer be financed under a Limited Recourse Borrowing Arrangement (LRBA) entered into from that date.

The ATO states that LRBAs are not banned and that the way they operate has not changed. The change is to which real property can be financed. An SMSF can still hold residential property that is not business real property if it meets all other rules, but it cannot borrow for it under an LRBA. This applies whether the lender is a bank, a non-bank lender or a related party.

An LRBA entered into before 10 August 2026 is not affected, including when the fund maintains or refinances it later. A binding contract exchanged before that date is also covered, even if settlement happens afterwards. If the contract is changed significantly, the ATO says it may be treated as a new arrangement, so talk to your adviser before agreeing to variations.

What Counts as Business Real Property for an SMSF Commercial Loan?

Business real property generally means land and buildings used wholly and exclusively in one or more businesses. Commercial premises leased to a business tenant are a typical example of business real property. Because residential investment property generally cannot be financed under a new LRBA, commercial property is one option for borrowing to buy property inside super.

Two timing points matter. The property must be business real property when the loan starts and must stay that way for the life of the loan. If it stops being used wholly and exclusively in a business, the fund may breach the borrowing rules. A later return to business use does not erase the earlier breach. The ATO says a property does not lose its status just because the owner is looking for a new tenant, but it does if the owner abandons plans to lease it.

If you want to buy a commercial property with super, check the tenant and use of the premises before you sign a contract. If the premises are waiting on business or occupancy approvals, the ATO says the fund needs to show the business has commenced when the loan is entered into.

How the SMSF Bare Trust and LRBA Structure Works

Under an LRBA, the trustee borrows to buy one asset, and a separate holding trust (often called an SMSF bare trust) holds it. The fund holds a beneficial interest and gets legal ownership once the loan is repaid. The lender's recourse is limited to that asset.

Several conditions shape what you can do:

• The loan must buy a single asset, or identical assets treated as one.
• You cannot put an existing fund asset into the arrangement.
• Borrowed money can cover costs like stamp duty and repairs, but not improvements.
• The holding trust cannot be a discretionary trust.
• A related party lender must charge no more than an arm's length interest rate.

The no-improvements rule is the main trade-off for a property that may need building work. Plan that work and its funding before you borrow.

SMSF Loan Repayments: A Worked Example at 6.75%

Repayments on an SMSF loan must be covered by the fund's rent and contributions, so test the numbers before you commit. The figures below are illustrative only and use an example rate of 6.75% p.a. over 25 years. They are not a quote.

Consider a fund borrowing $500,000 for a commercial unit. Principal-and-interest repayments at 6.75% come to about $3,455 a month, or roughly $41,450 a year. Interest-only repayments on the same loan would be about $2,810 a month, but the debt would not reduce during that period. If the rent is $2,900 a month, or $34,800 a year, the principal-and-interest option leaves a shortfall of about $6,650 a year. The trustees would need to cover that from contributions or cash already in the fund. For 2026-27 the concessional contributions cap is $32,500, so it is a limit on how much can be put in.

In this scenario the trustees could reduce the loan size, add a cash buffer, or choose a lender that allows an interest-only period. Each has a cost. A smaller loan needs more fund cash up front, and interest-only means higher repayments later because the principal must be repaid over a shorter remaining term. Our borrowing capacity page is a good place to test your own numbers.

How SMSF Rental Income Tax and the CGT Discount Work

A complying SMSF in accumulation phase pays 15 per cent tax on assessable income, which includes net capital gains. If the fund owned the asset for at least 12 months, a one-third CGT discount applies, which produces an effective rate of 10 per cent on the discounted gain.

That 10 per cent is not a fixed CGT rate. The result depends on the cost base, any capital losses and the fund's overall tax position. Capital losses can only be offset against capital gains.

In pension phase, income from assets supporting a retirement income stream may be exempt, but a gain is not automatically exempt because a pension has started. The fund must use the correct method and meet minimum pension standards. Your accountant should confirm the outcome for your fund, as tax results are never certain.

Does an SMSF Loan Count Towards Division 296 Tax?

No. LRBA amounts are never included in a member's total super balance for Division 296 purposes. Division 296 started on 1 July 2026 and applies at 15 per cent to the share of earnings linked to a balance above $3 million, with an extra 10 per cent above $10 million.

For other purposes, the picture differs. A member's share of an LRBA balance can count towards their total super balance if the loan began on or after 1 July 2018 and the lender is a related party, or the member has met a condition of release with no cashing restriction. That can affect contribution caps, so ask your accountant how it applies to you.

Choosing an SMSF Mortgage Broker and Comparing Lenders

An SMSF mortgage broker can compare SMSF lenders on your behalf, but you still need your accountant, and a specialist adviser, to confirm the strategy suits your fund. Lenders set their own LVR limits, deposit requirements and fixed or variable rate options. These vary by lender and depend on the property and your deposit size.

The ATO also has draft updates to its rulings on LRBA key concepts and business real property open for consultation. They are not final, so confirm current guidance before you settle on a structure.

If you are in Narre Warren North or Narre Warren South, we can walk through the structure with you. Our SMSF loans page explains how we work, and our investment loans team can look at options outside super.

Call one of our team or book an appointment at a time that works for you, and we will help you work out whether an SMSF loan fits your fund.

Frequently Asked Questions