What changed on 10 August 2026
You may have heard that SMSF borrowing rules shifted significantly in mid-2026. The short version is this: the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June 2026, and the new rules commenced 45 days later on 10 August 2026. SMSFs can no longer enter into new Limited Recourse Borrowing Arrangements (LRBAs) to purchase residential property.
Existing LRBAs are fully grandfathered. You do not need to sell, refinance, restructure, or unwind anything if your fund already had a residential LRBA in place before that date.
For new residential purchases inside an SMSF, borrowing through an LRBA is simply no longer on the table. Residential property can still be purchased using the cash reserves of the SMSF only, so for funds that are cashed up and able to buy without borrowings, the change in law has no real effect. There are also SMSF unit trust structures that can hold residential property with borrowing sitting inside the trust rather than the fund itself, a separate structure worth discussing with an SMSF specialist accountant.
Commercial is still open, but the definition matters
Commercial property LRBAs are completely unaffected by the August 2026 changes. SMSFs can still borrow to purchase business real property, which can be leased to related parties such as the fund members' own business at market rates.
The phrase "business real property" is the critical test. Section 66 of the SIS Act defines business real property as a real or leasehold interest in property used wholly and exclusively in one or more businesses. The definition does not refer to whether the property is commercial or residential. The distinction is about use, not building type.
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. 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.
In practice, this covers premises like warehouses, retail shops, and office spaces actively used in a business. Mixed-use property, vacant land, or property with private or residential use may need careful review before an LRBA is entered into.
One notable feature: the business occupying the property does not have to be unrelated to the fund. One of the most tax-effective structures for Australian small business owners with an SMSF is to have the fund purchase the commercial premises and lease it back to the business at market rent. That lease must be at a genuine arm's-length market rate and documented with a formal written agreement, per the ATO's requirements under section 109 of the SIS Act.
What the lending conditions look like
Commercial SMSF lending works through the same bare trust structure as any LRBA: the property is held in a bare trust, the SMSF is the beneficial owner, and the lender's recourse is limited to that one asset if the fund defaults.
From a practical lending standpoint, the deposit and LVR requirements are higher for commercial than for residential. Most specialist lenders in 2026 require a minimum deposit of 25% to 35% of the property's value, corresponding to an LVR of 65% to 75%. Beyond the deposit, the fund must also demonstrate sufficient liquidity to cover purchase costs like stamp duty, legal fees, and a cash buffer for ongoing expenses.
Most lenders require a minimum SMSF balance of $250,000 to $300,000 before considering an LRBA application, with some requiring $350,000 or more. This threshold exists because lenders want confidence the fund can service the loan if the property sits vacant for three to six months and still cover ongoing fund administration costs.
Interest rates on SMSF commercial loans carry a premium over standard investment lending, reflecting the specialist nature and limited recourse structure. The ATO also publishes safe harbour interest rate benchmarks for related-party LRBAs, these are updated periodically and should be confirmed with a broker or SMSF specialist at the time of application.
One important constraint: unlike the SMSF unit trust structure available for residential, a straight commercial LRBA generally cannot fund construction. The property must typically be already completed or purchased on a single-contract basis. A two-part land-and-build contract creates compliance problems under the LRBA rules. This is a detail to work through with a licensed SMSF specialist accountant and solicitor before contracts are signed.
A scenario to illustrate the mechanics
Consider a small business owner who runs a physiotherapy practice from leased premises. The business pays $48,000 per year in rent to a third-party landlord.
The owner's SMSF has $600,000 in accumulated balance. The fund identifies a suitable commercial tenancy suite priced at $750,000. At a 65% LVR, the SMSF would borrow approximately $487,500 and use roughly $262,500 from the fund as the deposit, with additional cash held in the fund to cover stamp duty, legal costs, and a liquidity buffer.
The fund would purchase the property via an LRBA and bare trust, then lease the premises back to the physiotherapy business at a market rate confirmed by an independent rental appraisal. The rent becomes income inside the SMSF, taxed at 15% in accumulation phase or 0% in pension phase (up to the Transfer Balance Cap). If the fund held the property for more than 12 months before disposal, the effective CGT rate in accumulation phase would be 10%.
This scenario is illustrative only. It does not account for specific fund circumstances, lender criteria, stamp duty, GST considerations, or state-specific costs. All of those factors require individual professional assessment.
What to consider next
If you run a business from leased premises and have an SMSF with meaningful balance, the commercial LRBA pathway is worth understanding in detail. Here are three concrete steps:
Confirm your property qualifies as business real property. This is not automatic. Have an SMSF specialist accountant review whether the property you have in mind meets the ATO's "wholly and exclusively in a business" test as set out in SMSFR 2009/1. Mixed use, partial personal use, or vacant land can all fail the test.
Assess your fund's capacity. An SMSF-accredited broker can model whether your fund balance, contribution stream, and expected rental income support the loan serviceability a specialist lender will require. This is a different calculation from a standard investment loan and needs a broker familiar with SMSF credit policies.
Align the structure with your broader fund strategy. Your SMSF trust deed, investment strategy, and any existing assets all need to be reviewed before an LRBA is established. An SMSF specialist accountant and solicitor should be across the deed, the bare trust documentation, and the lease terms before any contract is signed.
The EWC team coordinates the property sourcing and connects clients with specialist brokers and SMSF-accredited professionals. If you want to understand whether a commercial property purchase inside your SMSF is worth exploring further, book a free call or visit our services page for more detail on how we work.
General information only, not personal financial advice. Speak with a licensed adviser before acting.