The SMSF LRBA ban: borrowing restrictions and the "business real property" test

SMSF LRBA ban and the business real property test

New legislation restricting the use of limited recourse borrowing arrangements (LRBAs) in self-managed super funds (SMSFs) has received Royal Assent. The measure is commonly described as a ban on borrowing to acquire residential property, but it operates as a ban on borrowing to acquire property that is not "business real property". This distinction determines which acquisitions remain available. 

Overview of the ban

• The restrictions take effect from 10 August 2026. 

• From that date, an SMSF cannot enter a new LRBA to acquire property that does not meet the definition of business real property. Although framed around residential property, the operative test is business real property. Some residential property remains eligible and some commercial property does not. 

• Existing LRBAs, refinancing of existing arrangements, and new arrangements entered into before 10 August 2026, including those that settle after that date, are grandfathered and may continue. 

• To secure grandfathered treatment, contracts must be in place and all relevant entities, including the holding trust, must be correctly established before commencement. 

Business real property, defined 

Business real property is a defined term in subsection 66(5) of the Superannuation Industry (Supervision) Act 1993 and is explained in ATO ruling SMSFR 2009/1. It requires two conditions: 

1. An eligible interest: a freehold or leasehold interest, or a qualifying interest in Crown land, in real property; and 

2. The business use test: the land is used wholly and exclusively in one or more businesses, whether or not the business is carried on by the fund or its members. 

The test turns on use, not property type. "Business" expressly includes primary production. Key consequences of the definition include: 

• Residential property can qualify where it is used wholly and exclusively in a business (for example, a residence used entirely as a professional practice, or land held as trading stock by a property developer). 

• Commercial property can fail the test where it is only partly used in a business. 

There is unresolved uncertainty about whether an SMSF can borrow to acquire a new or off-the-plan commercial property that is not in business use at the point of acquisition. 

Application to rural and primary production property 

A rural property with a genuine farming or primary production enterprise is a standard example of business real property because the land is used in a business. Two points usually govern farm holdings: 

• Business use may be by an unrelated party. Land leased to and farmed by a third party can still satisfy the test. 

• Safe harbour for primary production land. Where land is used for primary production, it can still qualify as business real property despite a dwelling on the property, provided the area used for residential or private purposes does not exceed two hectares and the predominant use of the property remains primary production. Predominant use is assessed on the facts, including relative area and income. 

Practical distinctions that follow: 

• A working farm held in an SMSF will generally meet the test where the dwelling stays within the two-hectare limit and farming is the predominant use. 

Lifestyle blocks, hobby farms, and land not used in a genuine business are the holdings most likely to fall outside the definition and therefore outside what an SMSF may borrow to acquire from 10 August 2026. 

Areas needing further guidance 

Because the LRBA restriction now relies on a definition originally designed for related-party acquisition and leasing rules, its application to borrowing creates anomalies. Some residential property is permitted while some commercial property is not, and the treatment of newly constructed or off-the-plan commercial premises remains unclear pending further guidance. 

Talk to Boyce. Speak to your Boyce advisor to understand how the LRBA changes may affect your SMSF and what steps you may need to take before the new rules apply. 

This is general information only. It does not constitute personal financial or legal advice. The business real property test and the transitional rules are complex. Specific circumstances should be reviewed before any acquisition, transfer, or refinancing.