If you exchanged a contract for an apartment through your Self-Managed Super Fund before 10 August 2026, your Limited Recourse Borrowing Arrangement is protected regardless of when settlement occurs. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June 2026, prohibiting new residential LRBAs from approximately 10 August onward.
What the Residential LRBA Ban Means for Apartment Purchases
New borrowing arrangements to acquire apartments or any residential property through an SMSF cannot be entered into after the operative date of approximately 10 August 2026. The prohibition applies to all residential property regardless of whether the dwelling is newly constructed or an existing unit. Residential property does not satisfy the definition of business real property under section 66 of the SIS Act, which is the only category of real property now eligible for SMSF borrowing.
The grandfathering provision turns on the date of contract exchange. If you exchanged contracts before the commencement date, the LRBA remains compliant even if settlement occurs weeks or months later. No action is required for trustees with existing residential arrangements that were structured correctly under the pre-commencement rules.
SMSFs can still acquire residential property using existing fund assets without borrowing. The property cannot be acquired from a related party, and no member or related party of a member can occupy the dwelling.
How Borrowing Capacity Works Under Division 296 Tax
Borrowing capacity is now shaped by Division 296 tax, which commenced on 1 July 2026. Where a member's total superannuation balance exceeds $3 million at the end of the financial year, 15 percent Division 296 tax applies to the proportion of earnings attributable to the amount above that threshold. An additional 10 percent applies to the proportion of earnings above $10 million.
Outstanding LRBA amounts entered into on or after 1 July 2018 are included in a member's total superannuation balance in certain circumstances. This includes arrangements with an associate of the fund or where the member has satisfied a condition of release with a nil cashing restriction. Consider a legal assistant with a total superannuation balance of $2.9 million who establishes an LRBA with a related party lender to acquire an apartment for $800,000 with a deposit of $240,000 and borrowing of $560,000. The outstanding loan amount of $560,000 is included in the member's total superannuation balance, bringing the total to $3.46 million and triggering Division 296 tax on the excess.
The member's effective tax rate on fund earnings attributable to the amount above $3 million becomes 30 percent instead of 15 percent during the accumulation phase. Rental income from the apartment is taxed at 15 percent in the fund, then the proportion of earnings above the threshold attracts the additional 15 percent impost when the annual calculation is made.
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Limited Recourse Borrowing Arrangement Structure for Apartments
An LRBA requires the apartment to be held in a separate holding trust, often called a bare trust. The SMSF acquires a beneficial interest in the property and obtains legal ownership after the loan is repaid. If the loan defaults, only the asset held in trust is at risk. The lender's recourse against the SMSF trustees is limited to the apartment under the arrangement and cannot extend to other fund assets.
The borrowed money must be used to acquire a single asset. An apartment on a single title satisfies this requirement. Funds can also cover loan establishment costs and stamp duty. Borrowed funds cannot be used to improve the property after acquisition. An LRBA entered into on or after 7 July 2010 cannot include drawdowns for renovations or capital improvements.
A related party may provide a personal guarantee to the lender, but their recourse must also be limited to the asset under the arrangement and not any other SMSF assets. Arrangements entered before 7 July 2010 may have different conditions and should be reviewed against the rules that applied at the time.
Refinancing an Existing Residential LRBA
The 2026 legislation provides 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 all aspects of the new law as at 2 July 2026, and the circumstances in which a refinancing might be treated as a new LRBA under the post-commencement rules remain to be clarified.
Under the ATO's existing position, 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 terms, and changes to the ultimate beneficiaries of the arrangement. A new arrangement entered into after the commencement date would be subject to the prohibition.
Refinancing to secure a lower variable rate with the same lender or switching to a different lender on substantially similar terms is generally treated as maintaining the original arrangement. Increasing the loan amount beyond the original purchase price and associated acquisition costs, or extending the loan term significantly beyond the original schedule, may constitute a new arrangement. SMSF loans for lawyers structured before the cutoff remain protected provided refinancing does not materially alter the arrangement.
Contributions and Deposit Requirements
LVR limits for SMSF residential loans typically range from 70 percent to 80 percent depending on the lender. An apartment valued at the median for a target suburb would require a deposit of 20 percent to 30 percent of the purchase price, plus stamp duty and acquisition costs. These funds must come from existing superannuation balances or new contributions.
The concessional contributions cap is $32,500 per annum from 1 July 2026. The non-concessional contributions cap is $130,000 per annum. The bring-forward arrangement allows non-concessional contributions of up to $390,000 over three years where the member's total superannuation balance on 30 June of the previous year was below $1.84 million. Where the balance was between $1.84 million and $1.97 million, the bring-forward limit is $260,000 over two years. Where the balance was between $1.97 million and $2.1 million, only the annual cap of $130,000 applies. Where the balance equalled or exceeded $2.1 million, the non-concessional contributions cap is nil.
A legal assistant with a balance below the threshold can use the bring-forward provision to inject funds for a deposit and settlement costs within a single financial year. Contributions must comply with the work test or work test exemption where applicable, and the member must be under age 75 at the time of contribution.
Rental Income and Tax Treatment During Accumulation
Rental income from an apartment held in an SMSF is taxed at 15 percent during the accumulation phase. Deductions for interest on the LRBA, property management fees, council rates, strata levies, insurance, and repairs reduce the taxable income. Depreciation on the building and fixtures can also be claimed where applicable.
Interest rates on the LRBA must meet arm's length terms consistent with Practical Compliance Guideline PCG 2016/5. The ATO publishes safe harbour interest rates for SMSF LRBAs, updated annually. 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. This applies whether the lender is a related party or an institutional lender.
Genuine offset accounts offered by an authorised deposit-taking institution are not treated as a borrowing or a charge over fund assets under existing ATO guidance. Rental income deposited into an offset account linked to the LRBA reduces the interest payable without creating a compliance issue.
Capital Gains Tax on Apartment Sale
Capital gains on the apartment are taxed at 15 percent in the accumulation phase, with a one-third discount applied if the property is held for at least 12 months. The effective rate is 10 percent after the discount. In pension phase, capital gains are tax-free provided the apartment is a segregated pension asset or the fund has sufficient pension account balances to support the exempt current pension income claim.
The sole purpose test requires the apartment to be maintained solely to provide retirement benefits to members. The property cannot be occupied by a member, a relative of a member, or any other related party of a member at any time. Breach of the sole purpose test disqualifies the fund from concessional tax treatment and may attract penalties.
If the apartment was acquired before the commencement of the residential ban, it can be sold at any time and the proceeds remain in the fund. The prohibition applies only to new LRBAs over residential property, not to the ongoing ownership or disposal of assets acquired under pre-commencement arrangements. Investment loans for lawyers outside the SMSF structure remain available for those building a property portfolio without superannuation borrowing.
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Frequently Asked Questions
Can I still use my SMSF to buy an apartment after August 2026?
No, new Limited Recourse Borrowing Arrangements for residential property, including apartments, cannot be entered into after approximately 10 August 2026. You can still purchase an apartment using existing fund assets without borrowing. If you exchanged a contract before the commencement date, the arrangement is protected even if settlement occurs later.
Does refinancing my existing SMSF apartment loan count as a new borrowing?
The 2026 legislation allows maintaining or refinancing existing residential LRBAs entered into before the commencement date. However, a significant change to the terms or conditions may end the original arrangement and create a new one subject to the prohibition. The ATO had not published updated guidance on all aspects of this as at July 2026.
How does Division 296 tax affect my SMSF borrowing capacity?
Where your total superannuation balance exceeds $3 million, Division 296 tax of 15 percent applies to earnings above that threshold. Outstanding LRBA amounts entered into on or after 1 July 2018 are included in your total superannuation balance in certain circumstances, potentially triggering the additional tax. The effective tax rate on fund earnings above the threshold becomes 30 percent instead of 15 percent.
What deposit do I need for an SMSF apartment loan?
LVR limits for SMSF residential loans typically range from 70 percent to 80 percent, requiring a deposit of 20 percent to 30 percent of the purchase price plus stamp duty and acquisition costs. These funds must come from existing superannuation balances or new contributions subject to the concessional and non-concessional caps.
Can I claim tax deductions on my SMSF apartment loan?
Yes, interest on the LRBA, property management fees, council rates, strata levies, insurance, repairs, and depreciation are deductible against rental income taxed at 15 percent during accumulation phase. The interest rate must meet arm's length terms under PCG 2016/5, or income may be assessed as non-arm's length income and taxed at the highest marginal rate.
