Self-managed super funds can no longer borrow to acquire residential property under a limited recourse borrowing arrangement entered into on or after 10 August 2026.
The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 restricted new LRBAs to business real property only, which means residential investment properties can no longer be purchased with borrowed funds through your SMSF. The change does not prevent SMSFs from owning residential property outright or holding existing loans established before the cut-off date, but it does alter the financial pathway for Burwood-based members considering property as part of their retirement strategy.
Can You Still Hold Residential Property in Your SMSF?
You can hold residential property in your SMSF without borrowing. The restriction applies only to new borrowing arrangements. An SMSF may acquire residential property using member contributions, rollover funds, or accumulated investment returns, provided the property is not acquired from a related party and is not occupied by a member or anyone related to a member. The sole purpose test under section 62 of the SIS Act requires that all SMSF investments, including property, exist solely to provide retirement benefits.
Consider a fund with a balance sufficient to purchase a unit in a suburb such as Burwood without needing to borrow. The trustees could acquire the property outright and collect rental income, which would be taxed at 15 percent during the accumulation phase. The investment would need to meet the arm's length income and sole purpose requirements, and the property could not be rented to a member or their family.
What Happens to Existing SMSF Residential Loans?
Existing LRBAs entered into before 10 August 2026 are not affected by the legislative change. SMSFs with residential property held under a pre-existing LRBA can continue to service the loan, refinance the arrangement, or repay it in full without breaching the new rules. The transitional provisions also protect contracts exchanged before the cut-off date, even if settlement occurs later.
If your SMSF holds a residential property in Burwood under an LRBA established prior to the change, you may refinance that loan with a specialist SMSF lender without triggering the new restriction. Refinancing an existing arrangement does not constitute entering into a new LRBA for the purpose of the 2026 amendments.
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How Is Rental Income Taxed in an SMSF?
Rental income received by a complying SMSF is included in the fund's assessable income and taxed at 15 percent during the accumulation phase. Where the SMSF is paying a retirement-phase pension and the property is classified as a segregated current pension asset for the entire income year, rental income may be exempt under the exempt current pension income provisions. Where the fund uses the proportionate method, only a portion of the rental income is exempt, determined by an actuarial certificate.
During accumulation, deductions for property expenses such as rates, insurance, property management fees, and interest on an LRBA loan can be offset against rental income. Capital works deductions may also apply depending on the construction date and type of property. The net rental income after deductions forms part of the fund's taxable income.
What Are the Capital Gains Tax Rules for SMSF Property?
A capital gain arises when the SMSF disposes of the property through a CGT event. During the accumulation phase, net capital gains are taxed at 15 percent. Where the property has been held for at least 12 months, a one-third CGT discount applies, producing a maximum effective rate of 10 percent on the discounted gain. The actual tax liability depends on the property's cost base, capital improvements, selling costs, available capital losses, and the fund's overall tax position.
Where the property is held to support a retirement-phase pension and the fund's assets are fully segregated as current pension assets throughout the income year, the capital gain is disregarded. If the fund has both accumulation and pension interests, the ECPI exemption applies only to the proportion of the gain attributable to pension assets, as determined by the method used and any actuarial certificate.
How Does Division 296 Tax Affect SMSF Property Holdings?
From 1 July 2026, members with a total superannuation balance exceeding $3 million are subject to an additional 15 percent Division 296 tax on the proportion of earnings attributable to the amount above that threshold. Where the balance exceeds $10 million, an additional 10 percent applies to the portion above that second threshold. Both thresholds are indexed annually.
Division 296 tax applies to the fund's adjusted taxable income, not unrealised gains. Rental income and realised capital gains form part of the Division 296 earnings base. An increase in property value does not constitute a CGT event and does not by itself trigger Division 296 tax. The amount borrowed under an LRBA is disregarded when calculating a member's total superannuation balance for Division 296 purposes. SMSFs had the option to elect a cost base uplift to market value as at 30 June 2026 for assets held at that date, which may reduce the taxable component of future capital gains for Division 296 purposes.
Managing Property Within the Bare Trust Structure
Property acquired under an LRBA must be held in a separate holding trust, commonly referred to as a bare trust. The SMSF acquires a beneficial interest in the property and obtains legal ownership once the loan is fully repaid. The holding trust cannot be a discretionary trust or a unit trust with multiple unit holders. The borrowed funds must be used to acquire a single acquirable asset, and the asset cannot be subject to any charge other than under the LRBA itself.
The trustee of the bare trust is typically a related party or a corporate trustee acting solely to hold legal title. All investment decisions, including decisions about tenancy, property management, and rental terms, are made by the SMSF trustee. The holding trust arrangement does not alter the compliance obligations or tax treatment of the underlying investment.
What Property Management Obligations Apply?
Property held within an SMSF must be managed on an arm's length basis. The trustee must ensure that all transactions, including lease agreements, property management appointments, and maintenance contracts, reflect market terms. Rental income must be consistent with comparable properties in the area. A property manager may be appointed, and their fees are deductible.
The property cannot be leased to a member of the fund, a relative of a member, or any other related party. It cannot be used to provide any present-day benefit to a member. In the context of a Burwood property, this means a unit near Deakin University or an apartment close to Burwood Brickworks cannot be rented to your adult child, even at market rent, without breaching the SIS Act.
Trustees must maintain accurate records of all income and expenses, ensure compliance with state-based tenancy legislation, and include rental income and property-related transactions in the fund's annual financial statements and tax return. The auditor will review the property holding as part of the annual SMSF audit.
Contributions and Loan Serviceability
Where an SMSF holds property under an existing LRBA, loan repayments must be funded from the SMSF's cash flow, which includes rental income, member contributions, and investment returns. Contributions are subject to annual caps. From 1 July 2026, the concessional contributions cap is $32,500 per member per annum, and the non-concessional contributions cap is $130,000. The bring-forward arrangement may allow up to $390,000 in non-concessional contributions over three years, depending on the member's total superannuation balance.
Lenders assess SMSF loan serviceability based on the fund's rental income and capacity to meet repayments without relying solely on future contributions. Interest rates on SMSF residential loans are typically higher than standard home loans, and the maximum loan-to-value ratio is often lower. Working with an SMSF mortgage broker ensures the structure is compliant and the loan is appropriately structured.
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Frequently Asked Questions
Can I still buy residential property through my SMSF after the 2026 changes?
You can still buy residential property in your SMSF, but you cannot use a limited recourse borrowing arrangement entered into on or after 10 August 2026. The property must be purchased using existing fund assets, contributions, or rollovers without borrowing.
What happens to my existing SMSF residential loan?
Existing LRBAs entered into before 10 August 2026 are not affected by the legislative change. You can continue to service the loan, refinance it, or repay it in full without breaching the new rules.
How is rental income from SMSF property taxed?
Rental income is taxed at 15 percent during the accumulation phase. If the property supports a retirement-phase pension and meets the segregated asset conditions, the rental income may be exempt under the exempt current pension income provisions.
Can I rent my SMSF property to a family member?
No. SMSF property cannot be leased to a member of the fund, a relative of a member, or any other related party. This would breach the sole purpose test and related party rules under the SIS Act.
Does Division 296 tax apply to my SMSF property?
Division 296 tax applies to members with a total superannuation balance above $3 million. It is calculated on realised earnings, including rental income and capital gains, but not on unrealised property value increases.
