SMSF Loans & Vacant Land: What Not to Do After August 2026

New limited recourse borrowing arrangements for residential vacant land are no longer permitted from approximately 10 August 2026. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 restricts new LRBAs to business real property only, which excludes residential land regardless of its current state of development.

The 10 August 2026 Legislative Change

The amendment to subsection 67A(2) of the SIS Act permits new LRBAs only for property satisfying the business real property definition under section 66. Vacant residential land does not meet that definition. An SMSF may still acquire vacant residential land without borrowing, provided the acquisition complies with the related party and sole purpose test requirements. The restriction applies to new borrowing arrangements entered into on or after the commencement date. Existing residential LRBAs, including those for vacant land acquired before commencement, are protected under the grandfathering provisions.

Whether an arrangement qualifies for transitional protection depends on when the arrangement was legally entered into, not simply when a contract was exchanged. Documentation and surrounding circumstances determine this question. Legal advice should be obtained before assuming a particular transaction is protected.

Commercial Vacant Land Under the Business Real Property Definition

Vacant land qualifies as business real property where it is used wholly and exclusively in one or more businesses. The land must be in actual business use at the time of acquisition. A property intended for future commercial development does not satisfy the definition until that use commences. SMSFR 2009/1 sets out the ATO's position on the business real property definition and includes examples of land used for storage, parking, or other business purposes where the use is ongoing and exclusive.

Consider a fund trustee acquiring a vacant parcel leased to a logistics company for container storage. The land is fenced, graded, and used exclusively for that purpose under a commercial lease. The property satisfies the business real property definition at acquisition because the business use is current and exclusive. The SMSF may enter into an LRBA to fund the purchase. The lease must be on arm's length terms, particularly where the tenant is a related party of the fund.

Vacant Land Held for Future Development Does Not Qualify

Land held primarily for future development, rezoning, or capital appreciation is not used wholly and exclusively in a business at the time of acquisition. The business real property definition requires actual current use, not intended or speculative use. Where land is acquired with the intention of constructing a commercial building or subdividing for sale, the business use does not commence until construction or subdivision activity begins. An LRBA cannot be used to fund the acquisition of such land under the post-commencement rules.

Vacant land held pending development approval or rezoning is not in business use during that holding period. Where an SMSF has already acquired such land under a pre-commencement LRBA, the grandfathering provisions protect that arrangement. Where the acquisition has not yet occurred, the LRBA pathway is no longer available unless the land is already in qualifying business use.

Primary Production Land and the 2 Hectare Concession

Primary production property may include vacant land used wholly and exclusively for primary production activities such as grazing, cropping, or forestry. The 2 hectare dwelling concession in SMSFR 2009/1 applies only to primary production property and permits a dwelling occupying no more than 2 hectares without causing the property to fail the wholly and exclusively test, provided the main use of the whole property is primary production and not domestic or private.

This concession does not apply to residential land with a small agricultural component. A rural residential block with some grazing activity does not qualify as primary production property where the primary character of the land is residential. The concession is narrow and applies only where the land is genuinely used for primary production and the dwelling is incidental to that use.

Related Party Leasing and Arm's Length Terms

Where commercial vacant land is leased to a related party of the fund, the lease must be made on arm's length terms at market value. Business real property leased between the fund and a related party is excluded from the in-house asset rules, but only where the lease satisfies arm's length requirements. PCG 2016/5 addresses LRBA interest rates but does not cover lease rental terms. The fund trustees must independently establish that rental terms are consistent with market rates for comparable properties.

Income from an arrangement that does not meet arm's length terms may be assessed as non-arm's length income and taxed at 45 percent. Where a fund leases land to a member's related business, the rental amount, lease duration, and review terms should be supported by independent valuation or market evidence.

CGT Treatment on Disposal of Vacant Land

Vacant land held by an SMSF is a CGT asset. Where the land has been held for at least 12 months, the one-third CGT discount may apply in accumulation phase, producing a maximum effective rate of 10 percent on the discounted gain. The actual tax liability depends on the cost base, acquisition costs, selling costs, capital losses, and the fund's overall tax position for that year.

Where the fund is in pension phase and the land is a segregated current pension asset, the capital gain on disposal is disregarded. Where the fund uses the proportionate method to calculate exempt current pension income, the exemption applies only to the exempt proportion of the net capital gain. An actuarial certificate is required where the fund has both accumulation and pension interests and does not fully segregate assets.

Division 296 tax from 1 July 2026 applies to members with a total superannuation balance exceeding $3 million. A capital gain on disposal of vacant land forms part of the fund's Division 296 earnings base in the year the CGT event occurs. Unrealised increases in land value do not produce assessable income or Division 296 fund earnings until a CGT event is triggered. Trustees should consider the interaction between pension phase tax exemptions, Division 296 tax, and the timing of asset disposals when managing land holdings.

Refinancing Existing Vacant Land LRBAs

Existing residential LRBAs, including those for vacant land, may be maintained or refinanced under the grandfathering provisions. The ATO had not published updated guidance on the scope of permitted refinancing as at 22 July 2026. Under the ATO's existing position in PCG 2016/5 and related guidance, a significant change to the terms or conditions of an LRBA ends the arrangement and a new one begins. A new arrangement entered into after 10 August 2026 would be subject to the post-commencement restriction.

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. Trustees considering refinancing an existing SMSF loan involving residential vacant land should obtain specialist legal advice before proceeding to confirm the refinancing does not trigger the creation of a new LRBA under the post-commencement rules.

Commercial vacant land LRBAs are not affected by the 2026 restriction and may be refinanced on standard commercial terms, provided the refinanced loan relates to the same single acquirable asset, maintains the limited recourse character, and meets arm's length terms consistent with PCG 2016/5.

Contribution and Funding Strategies After the LRBA Pathway Closes

Where borrowing is not available, acquisition of vacant land requires sufficient fund liquidity or member contributions. The concessional contributions cap is $32,500 per annum from 1 July 2026. The non-concessional contributions cap is $130,000 per annum, with bring-forward arrangements available depending on the member's total superannuation balance on 30 June of the previous year.

Consider a solicitor with a total superannuation balance of $1.6 million at 30 June 2026 who wishes to acquire commercial vacant land for $400,000 in the 2026-27 financial year. The fund has $150,000 in cash. The member may access the bring-forward arrangement and contribute up to $390,000 in non-concessional contributions over three years, together with concessional contributions of $32,500 per annum. The acquisition may be funded through existing cash and staged contributions without the need for an LRBA, provided the trustee can settle the purchase using available funds at the time of acquisition.

Where a member's total superannuation balance exceeds $2.1 million, the non-concessional contributions cap is nil. Members in this position must rely on concessional contributions, fund earnings, or equity release from existing fund assets to fund further acquisitions. Debt recycling strategies outside the SMSF structure may be considered but require independent financial and tax advice.

Call one of our team or book an appointment at a time that works for you to discuss SMSF lending, commercial property acquisitions, and how the August 2026 legislative changes affect your fund's investment strategy.

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