LRBAs will soon be limited to business real property and exclude residential property (Revised version 31 July 2026)

By Daniel Butler, Nick Walker on 31/07/2026 in ATO, Limited recourse borrowing arrangements, SMSF compliance, SMSF strategy, Taxation, Trustee education

The Albanese Government’s deal with the Greens to secure passage of the first tranche of its major tax changes has placed limited recourse borrowing arrangements (LRBAs) back in the spotlight.

We outline below the changes to the LRBA rules that apply from 10 August 2026 reflected in the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (TLAA) relating to, among other things, the negative gearing and CGT changes (the first tranche of tax changes).

The TLAA passed both houses of parliament on 25 June 2026 and received Royal Assent on 26 June 2026. Accordingly, the restrictions on LRBAs are now law and the transitional period ends on 10 August 2026.

This article is an update to our prior article issued on 20 July 2026. Our comments in red reflect the guidance recently released by the ATO on what it considers to be a pre-existing arrangement and therefore not affected by the recent LRBA restrictions.

The Greens’ amendment to the Bill

Senator Nick McKim of the Greens moved an amendment to the definition of ‘acquirable asset’ in s 67A(2) of the Superannuation Industry (Supervision) Act 1993 (Cth) (SISA). This amendment provides that, where an asset is real property, it must be business real property within the meaning of s 66 of the SISA (see below). Simply put, this excludes any real property that is not business real property from being an acquirable asset for SMSFs.

Importantly, this change does not preclude an SMSF undertaking an LRBAs in respect of other acquirable assets such as shares in a company or units in a unit trust subject to the usual tests.

What is business real property?

Business real property is defined in s 66 of the SISA as the following:

(a) any freehold or leasehold interest of the entity in real property; or

(b) any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer; or

(c) if another class of interest in relation to real property is prescribed by the regulations for the purposes of this paragraph – any interest belonging to that class that is held by the entity;

where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not), but does not include any interest held in the capacity of beneficiary of a trust estate.

For example, a residential property that is used wholly and exclusively in one or more businesses will still be an acquirable asset under s 67A(2) following the amendment. However, a building which has an office and an apartment above, and is therefore partially used for residential purposes, will not be an acquirable asset.

There are a number of other circumstances where residential property can constitute business real property. We recommend that expert advice be obtained if there is any doubt.

When will the changes commence?

The changes apply to LRBA arrangements entered into on or after 10 August 2026.

What is an arrangement?

The amendment applies in relation to arrangements entered into on or after the commencement of the amendments, the important question is what will constitute an ‘arrangement’.

While there is no legislative framework on what is considered an arrangement that will qualify for ‘grandfathered’ relief prior to 10 August 2026, the ATO recently released guidance material that broadly provides that so long as the SMSF exchanges a binding contract before 10 August 2026, the LRBA arrangement should qualify for grandfathered relief.

Note that a contract of sale of real estate may be subject to certain conditions such as being subject to:

finance;
property inspection; and/or
zoning or another condition.

Broadly, for a contract of sale to qualify as being exchanged prior to 10 August 2026, it should not be subject to any condition precedent to the formation of a legally binding contract. A legally binding contract can have conditions subsequent. Whether a condition is a condition precedent or a condition subsequent is a matter of determination after a careful review of the contract and surrounding factual circumstances. This analysis is best undertaken by a lawyer. In particular, you should not assume that a contract of sale that is subject to finance involves a condition precedent and many are drawn to be conditions subsequent requiring the purchaser to use best efforts to apply for finance.

Off the plan arrangements also need to be carefully considered. While the ATO do consider that off the plan arrangements with contracts exchanged prior to 10 August 2026 will be grandfathered, there are still risks. For example, if the developer delays or the building does not proceed and contracts are rescinded, a question arises as to whether the replacement contract or amended terms are entered into before or after 10 August 2026.

However, provided the contract was exchanged prior to 10 August 2026 and the contract completes at settlement, grandfathered relief should apply despite finance not being approved until closer to settlement. The ATO also state that, in general, later variations of a contract of sale will not change this. However, the ATO consider that if a contract is changed significantly and the fundamental terms no longer exist, it may be considered that a new arrangement has begun.

The ATO further clarify that refinancing an LRBA after 10 August 2026 in respect of residential property should not give rise to a new arrangement, provided it is in respect of the same property.

Refinancing refers to the SMSF trustee entering into a new loan contract for the same asset with the same or new lender.

Importantly, for LRBAs entered into after 10 August 2026, the ATO states that the real property asset must continue to be business real property for the entire life of the LRBA. This means the asset must be wholly and exclusively used in one or more businesses for the duration of the LRBA. If the asset does not meet these rules, the SMSF has breached the law against borrowing and compliance action may apply.

Where to from here?

If residential property borrowing by SMSFs is being targeted because of perceived housing market impacts, it remains unclear why LRBAs will not be permitted for newly constructed housing to increase the potential supply of residential accommodation.

In particular, the Government is allowing negative gearing and the 50% CGT discount on new acquisitions of residential dwellings acquired by individuals (outside SMSFs) after its 12 May 2026 Budget. However, these two tax changes apply to established residential dwellings acquired after 7.30pm on 12 May 2026, as reflected in Schedule 2 of the Bill.

There are a number of tax concessions granted for large Build to Rent (BTR) developers to increase housing in Australia including:

an accelerated deduction of 4% for capital works relating to BTR developments; and
a concessional final withholding tax rate of 15% on eligible fund payments.
Some states and territories also offer tax incentives to BTR developers (eg, in Victoria, where land tax is calculated at the reduced rate of 50% of the taxable value of the land).

The PM states in its press release of 23 June 2026:

These [LRBA] arrangements constitute less than 1 per cent of total residential property borrowing and less than half a per cent of new residential borrowing each year.

Thus, providing the ability for SMSFs to continue to undertake LRBAs for new residential property is consistent with Government policy and would add to the supply of housing in Australia.

Lack of consultation and transition

As of March 2026, there were now 672,805 SMSFs and 1,239,977 members with total estimated assets of $1.06 trillion.[1] The above ‘agreement’ was undertaken without any consultation with this important SMSF sector that accounts for around 25% of Australia’s total retirement savings. Moreover, the SMSF Association has labelled this change as a case of political ‘deal making’.

Conclusions

Moving forward, we recommend that expert advice be obtained before proceeding with new or refinanced LRBA arrangements to make sure they comply with all applicable law.

DBA Lawyers is closely monitoring developments and will provide further updates as details emerge via its monthly SMSF Online Update webinars and regular monthly newsfeeds.

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