Kicked to the Curb: Changes to Limited Recourse Borrowing Arrangements
As a general rule, superannuation funds cannot borrow.
A limited recourse borrowing arrangement (LRBA) allows self-managed superannuation funds (SMSF) to borrow money principally from third party lenders such as a bank, non-bank lenders or related party lenders (Lender), to buy a single asset (Asset). An LRBA provides further protection from creditors as the Lender can only claim recourse against the Asset itself, not other assets held by the SMSF.
Prior to 10 August 2026, a LRBA could be utilised to purchase residential property. The borrowed money could be used to:
acquire the Asset; and
pay for expenses, such as loan establishment costs, stamp duty, maintenance and repair of the Asset.
From 10 August 2026, LRBAs can only be used to purchase business real property. Whilst there are no changes to how LRBAs operate, the changes apply to all SMSFs.
The changes do not apply if the SMSF entered a binding contract to acquire property (other than commercial property) prior to 10 August 2026 or maintains or refinances an LRBA that predates 10 August 2026. However, LRBAs established after 10 August 2026 must meet the new definition of ‘business real property’.
Business Real Property
‘Business real property’ means land that is used wholly and exclusively in a business. If the Asset does not meet this definition or stops being used wholly or exclusively for business for the duration of the LRBA, the SMSF will breach superannuation law, and compliance action may follow.
It is also important to note that some commercial property will fall short of this definition. Whether a property qualifies as business real property will depend on how the property is used, not just whether it is zoned for commercial use. Common examples of business real property include warehouses, medical suites, and commercial offices.
A common example is a property than contains a commercial shop downstairs and a residential property upstairs. This mixed use property is not business real property, and as such, cannot be purchased by an SMSF as a part of an LRBA.
What does this mean for Investors?
Members of SMSFs who wish to invest in property will now be required to consider whether the property meets the definition of business real property. Whilst SMSFs can still purchase residential property without borrowing from a Lender, members of SMSFs are recommended to seek specific legal advice to ensure compliance with new law.
Authored by Jemimah Fitzgerald of Harwood Andrews
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Jemimah has a strong interest in commercial transactions, preparation and negotiation of commercial contracts and property-related matters.
Jemimah also has a keen interest in charity and not-for-profit Law and regularly advises not-for-profits in relation to charity applications with the Australian Charities and Not for Profit Commission (ACNC).
Jemimah continues to build her experience in Commercial and Property Law and strives to help clients navigate various legal matters with a focus on practical and thoughtful solutions.
Jemimah’s professional commitments include:
Member of the Law Institute of Victoria
Member of the Geelong Law Association