What Are SMSF Loans for Smaller Dwellings?

Using your Self-Managed Super Fund to purchase a smaller dwelling as an investment property is no longer possible under current law.

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June 2026 and takes effect from approximately 10 August 2026. From that date, new limited recourse borrowing arrangements for residential property are prohibited. The ban applies to all residential property regardless of size, type, or whether it is newly constructed. Your SMSF can still acquire residential property using existing fund assets without borrowing, but you cannot acquire it from a related party and a member or related party cannot occupy it.

Limited Recourse Borrowing Arrangements Before the Ban

A limited recourse borrowing arrangement allowed your SMSF to borrow to acquire an investment property while limiting the lender's recourse to that asset alone. The property was held in a separate holding trust. Your SMSF acquired a beneficial interest in the property and obtained legal ownership after the loan was repaid. If the loan defaulted, only the asset held in trust was at risk. Rental income flowed to the SMSF and was taxed at a maximum of 15 percent during accumulation phase or zero percent in retirement phase.

Consider a tutor who wanted to purchase a one-bedroom apartment in their SMSF before the ban took effect. They exchanged contracts on a unit valued at the suburb median in late July 2026, using a 30 percent deposit from existing super contributions and a 70 percent SMSF property loan. The contract was exchanged before the operative date, so the arrangement is protected under grandfathering provisions even though settlement occurred in September. Rental income from the apartment flows to the fund and is taxed at 15 percent. The property will eventually form part of their retirement income stream.

What Happens to Existing Residential Arrangements

Existing limited recourse borrowing arrangements over residential property entered into before the commencement date are grandfathered. The trigger for protection is the date of contract exchange, not the settlement date. A contract exchanged before the operative date is protected even if settlement occurs after the ban takes effect. No action is required by trustees with existing compliant residential arrangements.

The new law provides that the residential prohibition does not apply to maintaining or refinancing a borrowing under an arrangement entered into before the commencement date. As at early July 2026, the ATO had not published updated guidance on the circumstances in which a refinancing arrangement might be treated as a new arrangement under the post-commencement rules. Under the ATO's existing position, a significant change to the terms or conditions of an arrangement ends it and a new one begins. Refinancing that is inconsistent with the original arrangement, borrowing to acquire an asset not contemplated under the original arrangement, and changes to the ultimate beneficiaries of the arrangement may end an existing arrangement. A new arrangement entered into after the commencement date would be subject to the post-commencement rules.

Commercial Property Remains Available for SMSF Borrowing

Your SMSF can still borrow to acquire commercial property that satisfies the definition of business real property under section 66 of the SIS Act. Business real property means land and buildings used wholly and exclusively in one or more businesses. The business in which the property is used does not need to be carried on by the entity holding the interest in the property.

A tutor running a private tutoring business through a separate company structure could purchase a small commercial office or retail premises in their SMSF and lease it to the business. The lease must be made on arm's length terms at market value. The property is excluded from the in-house asset rules because it meets the business real property definition. Rental income from the lease flows to the SMSF and is taxed at a maximum of 15 percent during accumulation phase.

Where the property contains a dwelling for private or domestic purposes, it can still qualify if the dwelling occupies no more than 2 hectares and the main use of the whole property is not domestic or private. Whether a property satisfies the business real property definition depends on its actual use at the time of acquisition. Vacant land not currently used in a business and mixed-use properties where the main use is domestic or private may not qualify.

Deposit and Borrowing Capacity Requirements

SMSF lenders require higher deposits than standard home loans. Most SMSF commercial loan products require a minimum deposit of 30 to 40 percent of the property value. The loan-to-value ratio for SMSF borrowing typically does not exceed 70 percent. Some lenders will lend up to 80 percent for commercial property in certain circumstances, but these products are uncommon.

Your SMSF's borrowing capacity depends on the rental income the property will generate and the ability of the fund to service the loan from rental income alone. Lenders do not take into account future contributions to the fund when assessing borrowing capacity. The rental income must be sufficient to cover loan repayments, interest, and ongoing property expenses such as rates, insurance, and body corporate fees. If the rental income is insufficient, the fund must have enough liquid assets to cover shortfalls without breaching contribution caps or liquidity requirements.

Working with a broker who understands SMSF property loans can help you identify which lenders will accept the property type you are considering and what income documentation they require from the fund. Requirements vary significantly between lenders. You can explore broader SMSF lending options through SMSF Loans for Teachers.

SMSF Loan Interest Rates and Structures

SMSF loan interest rates are typically higher than standard owner-occupied or investment loan rates. The difference reflects the additional complexity and risk of SMSF lending. Both SMSF variable rate and SMSF fixed rate products are available, though the range of lenders offering fixed terms is narrower.

The ATO publishes safe harbour interest rates for SMSF arrangements under Practical Compliance Guideline PCG 2016/5. These rates are updated annually and apply to both real property and listed securities held under a limited recourse borrowing arrangement. Income from an arrangement that does not meet arm's length terms may be assessed as non-arm's length income and taxed at the highest marginal rate. In practice, commercial lenders price SMSF loans within or above the safe harbour range. Working with an SMSF mortgage broker helps you compare SMSF lenders and identify which products meet the arm's length requirement while offering competitive pricing.

Using Super to Build Retirement Assets Without Borrowing

Your SMSF can still acquire residential or commercial property using existing fund assets without borrowing. The property cannot be acquired from a related party and cannot be occupied by a fund member or a related party of a member. This option depends on whether your fund has accumulated sufficient assets to purchase property outright or make regular additional property purchases as contributions flow into the fund.

Most tutors building super balances through regular contributions will not have sufficient assets to purchase property outright in the early stages of their career. Using super to buy investment property without borrowing becomes more realistic as your balance grows or where you consolidate balances from multiple funds. If you are considering this approach, you need to ensure the fund retains enough liquidity to meet pension obligations and pay expenses without needing to sell the property at an inopportune time. The sole purpose test requires that all investments be made to provide retirement benefits for members.

You can explore other strategies to build your property portfolio outside superannuation, including through Investment Loans for Teachers or Expanding Your Property Portfolio.

Division 296 Tax and the Total Superannuation Balance

From 1 July 2026, 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 total superannuation balance exceeds $10 million, an additional 10 percent Division 296 tax applies to the proportion of earnings above that threshold. Both thresholds are subject to indexation in subsequent years.

Outstanding LRBA amounts entered into on or after 1 July 2018 are included in a member's total superannuation balance in certain circumstances, including where the arrangement is with an associate of the fund or where the member has satisfied a condition of release with a nil cashing restriction. The inclusion of outstanding loan amounts may push a member's balance above the relevant threshold and trigger the additional tax on earnings.

If you have an existing residential arrangement or are considering a commercial property purchase through your SMSF, you should obtain advice from a licensed SMSF specialist on how the Division 296 tax applies to your circumstances. The interaction between the total superannuation balance calculation and outstanding loan amounts is complex and depends on the structure of the arrangement and the member's condition of release status.

Call one of our team or book an appointment at a time that works for you. We can help you understand how the new rules affect your retirement planning and what options remain available for building assets inside or outside your SMSF.

Frequently Asked Questions