Beginner's guide to SMSF loans for development sites

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June 2026 and will prohibit new limited recourse borrowing arrangements for residential property from approximately 10 August 2026.

Development sites present distinct compliance questions under the new framework. Whether your fund can borrow to acquire a particular site depends on classification at the time of purchase, not intended future use. A vacant block zoned residential is treated differently from land with existing commercial improvements, and both are treated differently again from a parcel containing a dwelling that forms part of a broader business operation.

How the residential ban affects vacant land

Vacant land zoned for residential use does not satisfy the business real property definition under section 66 of the SIS Act. Land that is not currently used wholly and exclusively in a business cannot be acquired under a post-commencement LRBA. The fact that you intend to develop the land or lease it to a third party after construction does not alter the classification at acquisition.

Consider a litigation lawyer with $2.4 million in their SMSF who identifies a subdivided residential lot suitable for future development. If the contract exchanges after 10 August 2026, the fund cannot borrow to acquire that lot. The same land could be purchased using existing fund assets without borrowing, subject to the related party and in-house asset restrictions under the SIS Act. Alternatively, the trustee could delay settlement to allow additional concessional or non-concessional contributions to accumulate, though contribution caps and the member's total superannuation balance will limit this option.

Business real property that includes a dwelling

A property can still qualify as business real property if it contains a dwelling for private or domestic purposes, provided the dwelling occupies no more than 2 hectares and the main use of the whole property is not domestic or private. The business does not need to be carried on by the SMSF or a related party.

Land that includes both a dwelling and substantial commercial improvements may qualify where the commercial element dominates actual use at acquisition. A former industrial site with a caretaker's cottage on a single title would need to demonstrate that the main use is business-related. The ATO's position in SMSFR 2009/1 is that this is a question of fact and degree. Classification depends on the physical characteristics of the property, the zoning, the lease terms if tenanted, and the proportion of land area and income attributable to each use.

If a mixed-use property does not satisfy the business real property definition at acquisition, the LRBA would be prohibited under the post-commencement rules. No change to the property's use after acquisition will cure a non-compliant classification at the time of purchase.

Single asset requirement for multiple titles

An LRBA can only be used to acquire a single asset or a collection of identical assets with the same market value that can be treated as a single asset. Multiple real property titles cannot be acquired under a single LRBA unless they are distinctly identifiable as a single asset, meaning they are bought and sold together, have equal market value, and cannot practically be separated.

A litigation lawyer seeking to acquire two adjoining commercial lots on separate titles would ordinarily need two separate LRBAs. If the lots are sold as a single parcel under one contract, have substantially identical market values, and cannot be separated without destroying the commercial utility of the acquisition, the ATO may accept them as a single asset. The safer approach is to structure the acquisition as a single title before the SMSF contracts to purchase, or to fund the acquisition without borrowing.

Contracts exchanged before the operative date

The trigger for grandfathering is the date of contract exchange, not settlement. A contract for residential or mixed-use land exchanged before approximately 10 August 2026 will be protected even if settlement occurs months later. No legislative instrument or ATO guidance as at 2 July 2026 addressed whether a conditional contract with a lengthy due diligence period would be treated as exchanged for grandfathering purposes. Standard conveyancing principles would ordinarily treat a contract as exchanged when signed by both parties, even if conditions precedent remain unsatisfied.

Trustees considering a residential or mixed-use development site under an LRBA should finalise contract negotiations and ensure exchange occurs before the operative date if they intend to rely on grandfathering. Settlement can occur at any time after that date without affecting the arrangement's compliance status.

Borrowing limits and fund liquidity

Lenders offering SMSF loans for commercial property typically require loan-to-value ratios between 50 and 70 percent depending on the property type and tenancy profile. Development sites with no existing income stream are assessed more conservatively than improved commercial property with an established lease. A fund acquiring a commercial site at $800,000 with a 60 percent LVR would need $320,000 in cash or liquid assets for the deposit, plus stamp duty and acquisition costs.

Fund liquidity after acquisition is a separate concern. The borrowed funds cannot be used to improve an existing asset under the LRBA rules. If the development site requires remediation, demolition, or infrastructure works before it can be leased, those costs must be met from the fund's existing assets. A fund with minimal liquidity after settlement may not be able to progress the development without waiting for additional contributions or investment returns to accumulate.

Division 296 tax applies from 1 July 2026 to earnings attributable to total superannuation balances above $3 million. 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 LRBA is with an associate of the fund. A litigation lawyer with an existing balance near the threshold should model the effect of a substantial LRBA on their Division 296 tax position before proceeding.

Commercial property that qualifies without restriction

Land and buildings used wholly and exclusively in a business satisfy the business real property definition and can be acquired under an LRBA after the residential ban takes effect. Warehouses, retail premises, office buildings, and industrial facilities with no residential component are not affected by the 2026 amendments.

A development site that contains existing commercial improvements used in a business at the time of acquisition qualifies for an LRBA even if the trustee intends to demolish those improvements and redevelop the site at a later date. The classification is determined by actual use at acquisition, not future plans. Once the SMSF owns the property, borrowed funds cannot be used for capital improvements under the LRBA framework, so redevelopment would need to be funded from the SMSF's other assets or deferred until the loan is repaid.

Related party transactions are permitted for business real property. An SMSF can acquire commercial land from a member or a related party of a member provided the acquisition is made on arm's length terms at market value. The same property could be leased back to the member's business under an arm's length lease, and rental income would not be treated as an in-house asset.

Refinancing and maintaining existing arrangements

The 2026 amendments provide that the residential LRBA prohibition does not apply to maintaining or refinancing a borrowing under an arrangement entered into before the commencement date. The ATO had not published updated guidance on refinancing by 2 July 2026. Under existing ATO positions, a significant change to the terms or conditions of an LRBA ends the arrangement and a new one begins.

Circumstances that may end an existing arrangement include 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. A litigation lawyer with a grandfathered residential development site should structure any future refinancing to preserve the terms and limited recourse character of the original LRBA. Switching lenders is less likely to create a new arrangement than increasing the loan amount or materially altering the security.

Sole purpose test and development intent

All SMSF investments must satisfy the sole purpose test under section 62 of the SIS Act. The fund must be maintained for the sole purpose of providing retirement benefits to members or benefits to dependants in the event of a member's death. Acquiring a development site that cannot produce income for an extended period may attract scrutiny if the trustee's predominant purpose appears to be providing a present-day benefit to a member or a related party.

A fund with several members and a diversified portfolio acquiring a single development site as part of a broader investment strategy is less likely to raise sole purpose concerns than a fund with one member, minimal other assets, and a development site located near the member's principal place of residence. The trustee's documented investment strategy, the proportion of fund assets allocated to the site, and the timeframe for generating rental income or disposing of the asset are all relevant to assessing compliance.

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