How to Meet LRBA Rules When Borrowing Through Your SMSF

If you want to use super to buy property with a loan, the structure has to be right before you sign anything. An SMSF is generally prohibited from borrowing, with an exception for a Limited Recourse Borrowing Arrangement (LRBA). An LRBA is the usual way an SMSF borrows to buy property, and since 10 August 2026 a new rule limits what real property can be bought this way.

This guide is for Goulburn residents thinking about a Self-Managed Super Fund loan, perhaps for a shop, office or workshop. We will walk through how the structure works and what the lender and the ATO will look for.

What Is an LRBA and How Does an SMSF Loan Work?

An LRBA is the usual way a super fund borrows to buy property. The SMSF trustee takes out a loan to buy an asset, which is held in a separate holding trust, and the lender's rights are limited to that asset.

The SMSF holds a beneficial interest in the property and gets legal ownership once the loan is repaid. This is often called an SMSF bare trust. The trade-off is that the structure adds set-up costs and ongoing paperwork. Our SMSF loans page explains how we approach these loans.

Does the New Business Real Property Rule Affect Your Purchase?

Yes, if your LRBA is entered into on or after 10 August 2026 to buy real property, unless you exchanged a binding contract before that date. The rule applies only to real property. From that date, real property bought under a new LRBA can only be business real property.

Business real property generally means land and buildings used wholly and exclusively in one or more businesses. The ATO states that LRBAs are not banned, and that the rule applies whether the lender is a bank, a non-bank lender or a related party. An SMSF can still hold residential property that is not business real property, but it cannot be financed through an LRBA.

An LRBA entered into before 10 August 2026 is not affected, including when it is refinanced later. The rule also does not apply where the SMSF exchanged a binding contract before that date, even if settlement happens afterwards. If a contract is changed significantly, the ATO says a new arrangement may be treated as starting.

Can You Buy a Commercial Property With Super?

Yes, you can buy a commercial property with super using an LRBA, provided it meets the business real property test and the other LRBA conditions. The property must also meet the sole purpose test, meaning the fund is run only to provide retirement benefits.

The property must be business real property when the loan starts and stay that way for the life of the loan. If it stops being wholly and exclusively used in business, the SMSF has breached the law against borrowing and compliance action may apply. Looking for a new tenant does not break the status, but abandoning plans to lease the premises does.

If you are planning to buy premises that cannot start trading straight away, for example while waiting on approvals, the ATO says the fund needs to show the business has commenced when the loan is entered into. Get specialist advice before you commit.

LRBA Structure Requirements: What the Loan Must Look Like

The borrowed money must buy a single asset, or a collection of identical assets with the same market value that can be treated as one asset. Under the new rule, a collection that is real property must also meet the business real property definition.

A few other requirements shape the loan:

• The loan can cover costs like establishment fees, stamp duty, maintenance and repairs, but not improvements to the property.
• An existing fund asset cannot be moved into an LRBA.
• The holding trust cannot be a discretionary trust.
• The asset cannot carry a charge other than the one tied to the borrowing.

If a related party lends to the fund, it must not charge more than an arm's length rate. Income caught as non-arm's length income is taxed at 45 per cent. The ATO's PCG 2016/5 sets out safe harbour terms, and the trustees still need documents showing the loan is arm's length.

A Worked Example: Premises Bought Through an SMSF

As an example, consider two Goulburn business owners who want their SMSF to buy a workshop their company already leases. The property is used wholly in the business, so it meets the business real property test.

They set up a holding trust and arrange a loan over the property. To show how repayments look, we use an illustrative rate of 6.75% p.a. over 25 years, which is not a current offer. A loan of $500,000 would then have repayments of about $3,455 a month. The rent from their company, paid at a market rate, helps the fund meet those repayments.

The outcome is a loan that sits within the rules. They keep records of the lease and the arm's length terms. Their risk is that the fund relies on that one property, and if the business moves out, the property could stop being business real property and breach the rules. They plan for this before they sign. Use our borrowing capacity page to start testing numbers, and speak to your accountant about the tax side.

How Is Property Income and Capital Gain Taxed in an SMSF?

A complying SMSF is generally taxed at 15 per cent on its assessable income, which includes net capital gains. If the asset was owned for at least 12 months, a one-third CGT discount applies, giving an effective rate of 10 per cent on the discounted gain.

In pension phase, some income may be exempt, but a capital gain is not automatically exempt just because a pension has started. Division 296 tax also applies from 1 July 2026 to members with a total super balance above $3 million, and LRBA amounts are never included in that balance for Division 296 purposes. Tax outcomes depend on your situation, so please speak with your accountant.

What Do Lenders Look at in an SMSF Loan Application?

Lenders assess the fund's ability to service the loan, so your fund's income, contributions and balance matter. Deposit requirements and LVR limits vary by lender.

It helps to compare SMSF lenders before choosing, as interest rates, fixed or variable options and fees differ. A fixed rate gives repayment certainty but may cost you if you exit early. A variable rate can move up or down. Some lenders also allow offset accounts, and genuine offsets from authorised deposit-taking institutions are allowed. If you already hold a loan, our refinancing team can review it, and our commercial loans page covers the non-SMSF options.

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