This article explores the impact on negatively geared SMSFs from:
- the new limited recourse borrowing arrangement (LRBA) related party interest rates; and
- the changes in the 2026–27 Budget.
New LRBA related party interest rates
Many SMSFs that borrow do so from a related party lender. In this case, SMSFs often choose to replicate the safe harbour terms in ATO Practical Compliance Guidelines PCG 2016/5. The advantage of using those terms is that the ATO states in PCG 2016/5:
… for income tax compliance purposes, the Commissioner accepts that an LRBA structured in accordance with this Guideline is consistent with an arm’s length dealing and that the NALI provisions do not apply purely because of the terms of the borrowing arrangement.
Under the PCG 2016/5, the interest rate for real estate is the:
Reserve Bank of Australia Indicator Lending Rates for banks providing standard variable housing loans for investors. Applicable rates:… For the 2016-17 and later years, the rate published for May (the rate for the month of May immediately prior to the start of the relevant financial year)
Recently, the RBA published that rate for May 2026 of 9.35%. Of course, that rate is what related party LRBAs using PCG 2016/5 should adopt from 1 July 2026 for FY2027.
Compare 9.35% to the PCG 2016/5 rate for FY2016 (ie, approximately a decade ago when PCG 2016/5 was first introduced), namely, 5.95%. In other words, interest rates are now significantly higher. The odds of seeing a negatively geared SMSF are therefore also higher.
What good is negative gearing in SMSFs?
Negative gearing is typically most valuable in the hands of taxpayers on a high marginal rate of income tax.
SMSFs typically pay a top rate of 15% tax. This of course is a relatively low rate of tax compared to say individual taxpayers who can pay up to 45% plus the Medicare levy.
Accordingly, a $100 negatively geared loss in an SMSF might only save $15. In contrast, that same $100 negatively geared loss for a high-earning individual might save $47.
However, negatively geared losses in an SMSF offset any other SMSF assessable income. Such income might include concessional contributions. Remember: even if an SMSF is otherwise 100% in pension mode, concessional contributions are still assessable income.
Accordingly, consider an SMSF where:
- The SMSF recently borrowed $1 million from a related party to acquire a residential dwelling under an LRBA.
- The LRBA complies with PCG 2016/5.
- The SMSF earns net rent (before interest) of $20,000 pa from the residential dwelling.
- The SMSF has three members, all of whom have $32,500 of concessional contributions in FY2027. That is a total of 3 x $32,500 = $97,500.
That SMSF might be negatively geared by approximately $73,500. Of course, this is calculated as $20,000 of net rent less $93,500 of interest (ie, $1 million x 9.35% of interest).
That negatively geared loss could offset the concessional contributions. Accordingly, the SMSF would probably not have to pay the usual $14,625 in respect of the contributions. This is calculated as 15% x $97,500. Instead, the SMSF might only need to pay $3,600 (ie, 15% x [ $97,500 – $73,500] ). Naturally, this represents a $11,025 saving.
Of course, the SMSF trustee should still consider whether negatively gearing is prudent and appropriate due to — among other things — the investment covenants in s 52B(2) of the Superannuation Industry (Supervision) Act 1993 (Cth). These covenants require SMSF trustees:
(f) to formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the fund including, but not limited to, the following:
(i) the risk involved in making, holding and realising, and the likely return from, the fund’s investments, having regard to its objectives and its expected cash flow requirements;
(ii) the composition of the fund’s investments as a whole including the extent to which the investments are diverse or involve the fund in being exposed to risks from inadequate diversification;
(iii) the liquidity of the fund’s investments, having regard to its expected cash flow requirements;
(iv) the ability of the fund to discharge its existing and prospective liabilities;
The covenants in s 52B(2)(f) are also reflected in the operating standard imposed on SMSFs to formulate, review regularly and give effect to an investment strategy under regulation 4.09 of the Superannuation Industry (Supervision) Regulations 1994 (Cth). There is one additional requirement in reg 4.09 that needs to be satisfied in addition to those listed above, namely:
(e) whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund.
The cash flow and ability to discharge liabilities are key concerns when an SMSF has a negatively geared investment. Having such an investment requires consideration of making ongoing loan repayments and other expenses at times during periods where no income may be derived.
Impact of the 2026–27 Budget
The 2026–27 Budget announced — among other things — limits on negative gearing. However, it stated that it would exclude superannuation. For example, the Budget states:
The reforms to negative gearing … are prospective and respect previous investment decisions, and will not impact … superannuation tax arrangements [Page 30, Budget 2026–27, Budget Strategy and Outlook, Budget Paper No 1]
Indeed, consider the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (Cth) that was passed by Parliament on 25 June and received royal assent on 26 June 2026.
This Act introduces — among other things — the announced limits on negative gearing. The Act excludes a complying superannuation entity. See new s 26‑155(4)(b) of the Income Tax Assessment Act 1997 (Cth). The Act’s changes take effect from FY2028.
However, there are many SMSFs that might be indirectly exposed to negative gearing. For example, consider an SMSF where:
- In FY2028, an SMSF acquires 50% of the units in a newly established unit trust. (The unit trust is not a related trust.)
- The unit trust takes out a loan to acquire a residential dwelling (which is used or held as residential accommodation).
- The unit trust has a total of $18,000 of gross income compromised of $15,000 of rent from the residential dwelling and $3,000 of interest income from a bank account.
- The unit trust has $20,000 of interest expense on a bank loan used to acquire the residential dwelling.
- (For simplicity, assume there are no other income or expenses.)
On its face, the unit trust will be negatively geared with a net loss position of $2,000 (calculated as $15,000 – $20,000 + $3,000). However, the unit trust will have $3,000 of ‘net income’ to distribute to its unit holders. The negatively geared loss of $5,000 in FY2028 is carried forward by the trustee of the unit trust for the next income year. Accordingly, the SMSF will have $1,500 of assessable income (ie, 50% x $3,000) from the unit trust.
Note that new s 26‑155(7) generally applies to a beneficiary of a trust that derives net income from a trust to the extent that such income relates to residential accommodation. For example, if a unit holder negatively geared its units in a unit trust and that unit trust derives income from the use of residential dwellings acquired after 7:30pm on 12 May 2026 as residential accommodation, then the new negative gearing restriction applies to that unit holder. In essence, the negative gearing limit applies to the extent that the income from the unit trust is referable (either directly or indirectly through one or more interposed partnerships or trust estates) to using or holding residential dwelling as residential accommodation.
However, an SMSF that negatively gears units in a unit trust may not be impacted as complying superannuation entities are excluded from s 26-155.
Note that residential dwellings acquired before 7:30pm on 12 May 2026 are not subject to the new negative gearing limits nor are commercial and non-residential properties.
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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional. The above does not constitute financial product advice. Financial product advice can only be obtained from a licenced financial adviser under the Corporations Act 2001 (Cth).
Note: DBA Lawyers presents monthly online SMSF training. For more details or to register, visit www.dbanetwork.com.au or call 03 9092 9400.
For more information regarding how DBA Lawyers can assist in your SMSF practice, visit www.dbalawyers.com.au.
By Bryce Figot ([email protected]) Special Counsel, and Daniel Butler ([email protected]) Director, DBA Lawyers
DBA LAWYERS
2 July 2026
