Understanding SMSF Property Rules After August 2026

From 10 August 2026, SMSFs can no longer borrow to acquire residential property under a limited recourse borrowing arrangement.

The change does not prevent SMSFs from owning residential property. Funds can continue to hold existing residential assets, acquire property without borrowing, and manage those investments within the framework of the SIS Act. For Richmond investors who have built up superannuation balances over several years, the restriction creates a different set of decisions around property management, compliance, and the ongoing administration of assets already held in trust.

How the August 2026 Restriction Works

The restriction applies to LRBAs entered into on or after 10 August 2026 where the asset being acquired is residential real property. An LRBA entered before that date is not affected, even if the loan continues to be drawn down or refinanced after the change commenced. The law does not prohibit residential property ownership through an SMSF. It prohibits the use of borrowing to acquire that property. An SMSF with sufficient cash or liquid assets can still purchase a residential property outright, provided the acquisition complies with the sole purpose test and is not from a related party.

Consider a Richmond fund that exchanged contracts on a residential unit in Burnley on 5 August 2026 but did not settle until 20 August 2026. The transitional provisions protect that arrangement. The LRBA is treated as having been entered into before the restriction commenced, and the fund can proceed with settlement under the original terms. A contract exchanged on 12 August 2026 for a similar property does not qualify for the transitional protection, and the LRBA cannot be used to acquire residential property.

Managing Existing Residential Property Under an LRBA

Existing LRBAs over residential property continue to operate under the same legal framework that applied when they were entered into. The holding trust structure remains in place. The SMSF retains its beneficial interest in the property, and legal title transfers to the SMSF trustee once the loan is fully repaid. Rental income continues to flow to the SMSF and is taxed at the fund level. Loan repayments continue to be funded from rental income, member contributions, or other SMSF assets.

The restriction does not require an existing LRBA to be unwound or repaid early. The loan can be refinanced with a different lender or on different terms, provided the refinancing does not involve acquiring a different property. If the SMSF decides to sell the property held under an LRBA and use the proceeds to acquire a different residential property, that new acquisition cannot be funded with an LRBA. The fund would need to purchase the replacement property without borrowing or acquire business real property if borrowing is required.

Rental Income and Tax Treatment Within an SMSF

Rental income received by an SMSF is assessable income and is taxed at 15 percent during the accumulation phase. Allowable deductions include loan interest, property management fees, council rates, insurance, repairs, and capital works deductions under Division 43. Deductions for capital works are claimed over the prescribed period for the type of works undertaken. Rental losses within the SMSF cannot be distributed to members. They remain within the fund and can be carried forward to offset future income.

Where the SMSF has commenced a retirement phase pension and the rental property supports that pension, the rental income may qualify for the exempt current pension income exemption. The exemption applies where the fund's assets are fully segregated as current pension assets at all times during the income year. Where the fund uses the proportionate method, the exemption applies only to the portion of rental income attributable to the pension phase balance. An actuarial certificate is required in that circumstance.

Richmond funds holding rental property within an SMSF need to ensure rental income is banked into the fund's bank account and not to a personal account. All expenses must be paid from the SMSF bank account. The property cannot be used or occupied by a member, a member's relative, or any other related party of the fund. This prohibition applies regardless of whether rent is paid. A property acquired under an LRBA is subject to the same rules.

Capital Gains Tax on Disposal During Accumulation Phase

When a residential property held by an SMSF is sold, any capital gain forms part of the fund's assessable income and is taxed at 15 percent. Where the property has been held for at least 12 months, a one-third CGT discount may apply, reducing the effective rate to a maximum of 10 percent on the discounted gain. The actual tax depends on the fund's adjusted cost base, selling costs, capital improvements, capital losses, and the fund's overall tax position for that year.

The adjusted cost base includes the original purchase price, acquisition costs such as stamp duty and legal fees, and the cost of capital improvements made to the property. Repairs and maintenance do not form part of the cost base but are deductible in the year they are incurred. Capital works deductions claimed under Division 43 reduce the cost base and increase the amount of the capital gain on disposal. Capital losses from other assets can be offset against the capital gain, but cannot be offset against rental income or other assessable income.

For an SMSF that acquired a Richmond apartment in the Burnley precinct under an LRBA and later sells that property during accumulation phase, the capital gain calculation would include the original contract price, stamp duty, legal fees, and any capital improvements such as a kitchen renovation. Loan interest and property management fees would not form part of the cost base, as those expenses are claimed as deductions in the year they are incurred. If the fund holds other investments that have generated capital losses, those losses can be applied to reduce the net capital gain on the property sale.

Capital Gains Tax Treatment in Pension Phase

A capital gain on the sale of an SMSF property may be partially or fully exempt from tax where the property supports a retirement phase income stream. The exemption depends on whether the fund's assets are segregated or whether the proportionate method applies. Where all of the fund's assets support a pension at all times during the income year, the capital gain is disregarded. Where the fund has both accumulation and pension interests, only the portion of the gain attributable to the pension phase is exempt.

The exemption is not automatic. The SMSF must satisfy the minimum pension payment requirements for the income year. Where the proportionate method is used, an actuarial certificate is required to determine the exempt proportion. The certificate calculates the percentage of the fund's income that is exempt based on the ratio of pension liabilities to total liabilities. The capital gain is then split according to that percentage.

Richmond funds planning to dispose of residential property should consider the timing of the sale relative to pension commencement and the fund's segregation status. A property sold one month before a pension commences will be taxed in full during accumulation phase. A property sold one month after pension commencement may qualify for partial or full exemption, depending on whether the fund's assets are segregated. The difference in tax treatment can be significant on properties with substantial unrealised gains.

Division 296 Tax and SMSF Property Holdings

From 1 July 2026, Division 296 tax applies where a member's total superannuation balance at the end of the financial year exceeds $3 million. Division 296 tax of 15 percent applies to the proportion of earnings attributable to the amount above that threshold. Where the balance exceeds $10 million, an additional 10 percent applies to the proportion of earnings above that threshold. Both thresholds are indexed annually.

For SMSF purposes, Division 296 fund earnings are an adjusted amount of the fund's taxable income. Rental income and realised capital gains contribute to the Division 296 calculation. 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. The property must be sold for the gain to be realised. LRBA amounts are disregarded when calculating a member's total superannuation balance for Division 296 tax purposes.

An SMSF may elect to adjust the cost base of its CGT assets to market value as at 30 June 2026 for Division 296 fund earnings purposes. This election recognises accrued value prior to the commencement of Division 296 tax. The election applies to all CGT assets held directly by the SMSF at 30 June 2026, cannot be revoked, and must be made by the due date of the 2026-27 SMSF annual return. Members do not need to be over the threshold for the fund to make this election. Funds holding Richmond residential property acquired before 30 June 2026 should consider whether the election is appropriate based on the property's unrealised gain and the likelihood of future disposal.

Compliance Requirements for Property Held in a Holding Trust

Where residential property is held under an LRBA, the holding trust must be maintained as a separate legal entity. The SMSF trustee holds a beneficial interest in the property, and the holding trustee holds legal title. The holding trust deed must grant the SMSF trustee the right to acquire legal title upon repayment of the loan. A discretionary trust cannot be used as a holding trust. The holding trust cannot be one in which the SMSF trustee is one of a number of unit holders in a unit trust.

All rental income from the property must be paid to the SMSF. Expenses related to the property must be paid from the SMSF bank account or the holding trust bank account, depending on the terms of the LRBA and the holding trust deed. The property cannot be subject to any charge other than the charge securing the LRBA. This means the property cannot be used as security for a separate loan or guarantee.

Richmond investors need to ensure the holding trust is administered separately from the SMSF's other investments. The holding trust requires its own ABN and TFN. Rental income must be declared in the holding trust tax return, although the income is assessable to the SMSF. The holding trust deed should be reviewed periodically to confirm it remains compliant with the requirements of sections 67A and 67B of the SIS Act. Once the loan is repaid, legal title transfers to the SMSF trustee, and the holding trust can be wound up.

Refinancing an Existing LRBA After August 2026

An existing LRBA over residential property can be refinanced after 10 August 2026 without triggering the restriction. Refinancing means replacing the loan with a different loan over the same property held in the same holding trust. The refinancing may involve a different lender, a different interest rate, or a different loan term. The refinancing cannot involve acquiring a different property or increasing the loan amount to improve the property.

Where an SMSF refinances an existing residential LRBA, the holding trust structure remains in place. The new lender takes a charge over the property in the same manner as the original lender. The SMSF continues to hold a beneficial interest in the property, and the right to acquire legal title remains unchanged. The refinancing must be documented in accordance with the terms of the holding trust deed and the requirements of the SIS Act.

For Richmond funds with an existing SMSF residential loan over a property in Richmond, Cremorne, or Burnley, refinancing may allow access to lower rates or more suitable loan terms without unwinding the LRBA structure. The refinancing must not alter the fundamental character of the arrangement. If the refinancing involves acquiring a different property or converting the loan to a non-LRBA structure, the transitional protection is lost, and the restriction applies.

Where SMSF Property Management Fits Within Your Retirement Strategy

Property held within an SMSF is one component of a retirement strategy. The decision to hold residential property through a fund depends on the member's overall superannuation balance, the size of contributions being made each year, the fund's liquidity, and the member's retirement timeline. Property generates rental income and potential capital growth, but it also requires ongoing management, exposes the fund to market risk, and reduces the fund's ability to meet pension payments or other liabilities without selling the asset.

Richmond investors considering whether to retain existing residential property within an SMSF or transition to other investments should assess the property's performance relative to the fund's objectives, the tax treatment of rental income and capital gains in accumulation and pension phase, and the impact of Division 296 tax where the member's balance exceeds the thresholds. The fund's investment strategy must be reviewed annually and must consider diversification, liquidity, insurance, and the ability to meet the fund's liabilities as they fall due.

Where a fund holds residential property under an LRBA, the loan repayment schedule affects the fund's cash flow. Rental income may not cover the full loan repayment, particularly in the early years of the loan. The shortfall must be funded from member contributions or other fund assets. If the fund does not have sufficient liquidity, the property may need to be sold to meet the fund's obligations. The decision to retain or dispose of the property should be documented in the fund's investment strategy and reviewed in conjunction with the fund's auditor and SMSF specialist.

Call one of our team or book an appointment at a time that works for you to discuss how the August 2026 changes affect your SMSF property arrangements and what steps are required to maintain compliance.

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