Top tips to use super for property purchase

Borrowing through your Self-Managed Super Fund to acquire residential property is no longer available for new arrangements.

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June 2026 and restricts new limited recourse borrowing arrangements involving residential property from approximately 10 August 2026. If you've been considering using super to buy an investment property, the window for new residential borrowing has effectively closed. Commercial property borrowing through an SMSF remains available, subject to strict conditions.

What Changed with SMSF Residential Borrowing

From approximately 10 August 2026, new limited recourse borrowing arrangements can only be used to acquire business real property as defined under section 66 of the SIS Act. Residential property does not meet that definition. This doesn't prevent SMSFs from owning or acquiring residential property outright, but it does prevent using borrowed funds to do so. Existing arrangements entered into before the commencement date are protected, as are certain eligible refinancings. Whether an arrangement qualifies for transitional protection depends on the specific documentation and circumstances. You'll need specialist legal advice to confirm whether a transaction falls within the grandfathering provisions.

How Commercial Property Borrowing Still Works

Limited recourse borrowing arrangements for commercial property remain available where the property satisfies the business real property definition. Business real property means land and buildings used wholly and exclusively in one or more businesses. The business doesn't need to be carried on by the entity holding the property. A pharmacy premises leased to an unrelated tenant would typically qualify, provided the property is used wholly and exclusively for business purposes. A property marketed as commercial doesn't automatically satisfy the definition. Actual use at the time of acquisition determines compliance, and that's a question of fact.

Consider a pharmacy manager with a balance approaching $800,000 in their SMSF. They identify a retail pharmacy premises available for lease to an established pharmacy operator. The property is zoned commercial, currently tenanted, and generates rental income. After engaging an SMSF specialist and establishing a bare trust structure, the fund borrows to acquire the property under a Limited Recourse Borrowing Arrangement. The loan is limited to the asset held in the trust, rental income flows to the SMSF, and the property qualifies as business real property under section 66 of the SIS Act. The fund pays tax on rental income at 15 percent during the accumulation phase, and the manager continues making concessional contributions within the annual cap to service the loan and build retirement capital.

SMSF Loan Structures and Bare Trusts

Every SMSF property loan requires a bare trust structure. The borrowed money is used to acquire the asset, which is held in a separate trust. Your SMSF acquires a beneficial interest in the property and obtains legal ownership once the loan is repaid. If the loan defaults, the lender's recourse is limited to the asset held in the trust. Other SMSF assets are protected. Investment returns from the property flow to the SMSF. The borrowed funds must be used to acquire a single asset or a collection of identical assets treated as a single asset. You can include expenses like loan establishment costs and stamp duty, but you cannot use borrowed funds to improve an existing asset or refinance an asset already owned by the fund.

LVR and Deposit Requirements for SMSF Loans

Most lenders offering SMSF property loans require a loan-to-value ratio of no more than 70 percent for commercial property, meaning a deposit of at least 30 percent. Some lenders may accept 80 percent LVR in limited circumstances. SMSF deposit requirements are substantially higher than for standard residential lending. The deposit must come from existing SMSF assets or eligible contributions. You cannot use funds from outside the SMSF unless they're contributed in accordance with contribution caps and accepted by the fund. Related party contributions must meet arm's length terms. For a commercial property valued at $1 million, your SMSF would need between $300,000 and $400,000 available for deposit and associated costs including stamp duty, legal fees, and loan establishment costs. Lenders assess the fund's capacity to service the loan from rental income and ongoing contributions. The fund's cash flow, not your personal income, determines borrowing capacity.

Tax Treatment of Rental Income and Capital Gains

A complying SMSF is taxed at 15 percent on assessable income, including rental income and net capital gains, during the accumulation phase. Where the fund holds a property for at least 12 months before disposal, a one-third CGT discount may apply, producing a maximum effective rate of 10 percent on the discounted gain. The actual tax liability depends on the property's adjusted cost base, acquisition and selling costs, capital improvements, capital works deductions, capital losses, and the fund's overall tax position for that year. Capital losses can only be offset against capital gains, not against rental income.

Where a fund has commenced a pension and the property supports a retirement-phase income stream, the fund may receive an exemption on investment income called exempt current pension income. Where the fund's assets are fully segregated as current pension assets, a capital gain on disposal is disregarded. Where the fund uses the proportionate method, the exemption applies only to the exempt proportion of the net capital gain. The outcome depends on the method used to calculate ECPI, the transfer balance cap, whether minimum pension payment requirements have been satisfied, and the fund's specific circumstances. An SMSF with both accumulation and pension interests may have partial ECPI exemption. You'll need an actuarial certificate in certain circumstances.

Division 296 Tax from 1 July 2026

From 1 July 2026, where your total superannuation balance at the end of the financial year exceeds $3 million, an additional 15 percent tax applies to the proportion of earnings attributable to the amount above that threshold. Where your balance exceeds $10 million, an additional 10 percent tax applies to earnings above that higher threshold. Both thresholds are subject to indexation. Division 296 tax applies to an adjusted amount of the fund's taxable income. Rental income and realised capital gains may contribute to the Division 296 calculation. An unrealised increase in property value does not by itself produce assessable income or Division 296 fund earnings. LRBA amounts are disregarded when calculating your total superannuation balance for Division 296 tax purposes. An SMSF may elect to make a CGT adjustment to the cost base of its CGT assets to market value as at 30 June 2026, which recognises accrued value prior to the commencement of Division 296.

Related Party Leasing and Arm's Length Terms

Business real property leased between the fund and a related party is excluded from the in-house asset rules, but any such lease must be made on arm's length terms at market value. You cannot lease a commercial property owned by your SMSF to a pharmacy business you own or control unless the lease terms, rental amount, and other conditions reflect what would apply between unrelated parties dealing at arm's length. The ATO publishes guidance on arm's length terms for SMSF LRBAs under Practical Compliance Guideline PCG 2016/5, including safe harbour interest rates updated annually. Income from an arrangement that does not meet arm's length terms may be assessed as non-arm's length income and taxed at 45 percent. SMSF loans require careful structuring and ongoing compliance.

Refinancing Existing SMSF Loans

The restriction on new residential LRBAs does not apply to maintaining or refinancing a borrowing under an arrangement entered into before the commencement date. As at 22 July 2026, the ATO had not published updated guidance on the circumstances in which a refinancing arrangement might be treated as a new LRBA under the post-commencement rules. Under the ATO's existing position, a significant change to the terms or conditions of an LRBA ends the arrangement and a new one begins. Circumstances that may end an existing arrangement include refinancing inconsistent with the original arrangement, borrowing to acquire an asset not contemplated under the original arrangement, and changes to the ultimate beneficiaries. A new arrangement entered into after the commencement date would be subject to the post-commencement rules and could not involve residential property. Refinancing of commercial LRBA arrangements is not affected by the 2026 restriction, provided the refinanced loan relates to the same single acquirable asset, maintains the limited recourse character of the original arrangement, and meets arm's length terms.

Contribution Caps and Building SMSF Capital

The concessional contributions cap is $32,500 per annum from 1 July 2026. The non-concessional contributions cap is $130,000 per annum. Pharmacy managers typically make concessional contributions through salary sacrifice arrangements, which reduce taxable income and allow after-tax contributions to be made within the super environment at 15 percent tax rather than marginal rates. Building sufficient SMSF capital to meet deposit requirements and service an SMSF loan requires a sustained contribution strategy over multiple years. The bring-forward arrangement allows non-concessional contributions of up to $390,000 over three years where your total superannuation balance on 30 June of the previous year was below $1.84 million. Where your balance was between $1.84 million and $1.97 million, the bring-forward limit is $260,000 over two years. Where your balance equalled or exceeded $2.1 million, the non-concessional contributions cap is nil. You'll need to coordinate contributions with your fund's borrowing and cash flow requirements.

Property acquisition through super is not a decision you make in isolation from your overall retirement strategy. The legislative framework has tightened substantially. Commercial property borrowing remains available but requires higher deposits, arm's length loan terms, ongoing compliance, and a clear understanding of how rental income and capital gains are taxed both during accumulation and pension phase. The Division 296 tax provisions add another layer of complexity for members with balances approaching or exceeding $3 million. You'll need advice from a licensed SMSF specialist before entering into any arrangement.

Call one of our team or book an appointment at a time that works for you. We work with SMSF specialists and can help you understand whether self-employed loans, investment loans, or SMSF structures align with your circumstances.

Frequently Asked Questions