The SMSF borrowing change lands on the middle of your client book, not the top

On 10 August 2026, the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 changed the rules on limited recourse borrowing arrangements. An SMSF can now only borrow to acquire real property if that property is business real property, as defined in subsection 66(5) of the Superannuation Industry (Supervision) Act 1993. The Australian Taxation Office confirmed the position in guidance published on 29 July. Existing arrangements, refinances of them, and contracts exchanged before 10 August are all unaffected, and funds can still buy residential property outright without borrowing.

The measure was framed as targeting the top of the sector. The ATO's own data says otherwise. Only 11 per cent of SMSFs carry a borrowing at all, and among those that do, borrowed assets make up 17.9 per cent of the average fund holding $500,000 to $1 million against 3.0 per cent of a fund holding $5 million to $10 million. The exposure sits in the middle, which means the clients affected are ordinary practice clients rather than the very wealthy, and there are probably more of them on your list than you would expect.

The test is about use, not zoning

Business real property is land used wholly and exclusively in one or more businesses. Zoning is irrelevant, and the business need not be carried on by the fund or its members, so a tenant's trading activity counts. That cuts both ways: a residentially zoned property used wholly in a business can qualify, and a commercially zoned one only partly used in a business does not.

Working from the definition and SMSFR 2009/1, the practical lists look like this.

Generally qualifies

• A standalone warehouse, factory or industrial unit on a commercial lease.

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  An office suite or consulting rooms with no residential component.

• Retail premises with nothing let separately above or behind.

• The premises a client's own business trades from.

• Farmland in genuine primary production, where a dwelling occupies no more than two hectares and domestic use is not predominant. That is the safe harbour in subsection 66(6).

Generally does not

• Vacant premises, because no business is being carried on.

• A shop with a flat let separately above it.

• A practitioner living above their own surgery or dispensary.

• Lifestyle blocks where no genuine business is carried on.

Serviced apartments and short-stay accommodation sit in a greyer area, and are being treated as residential by lenders whatever the technical argument.

The line that decides most contested cases is whether living space serves the business or serves a person. A motel with a manager's flat generally qualifies, because the accommodation is part of running the motel. A shop with a flat let above it does not. Same street, similar buildings, different answers.

Clients will not see that distinction, and the ones who assume "commercial is fine" are the ones who will exchange on something that cannot be financed.

Legally arguable and actually financeable are now two questions

Asked about mixed-use property, the ATO told the Australian Financial Review that not all of it is automatically excluded, and that "the significance of any non-business use must be considered in the context of the arrangement".

That is the regulator declining to draw a bright line, and in law it is the correct position. In practice it is cold comfort. In the conversations we have had with SMSF lenders since the change, the pattern has been consistent: anything with a residential component is being declined. The credit reasoning is sound, because if the security is later found not to be business real property the borrowing itself may be non-compliant.

So a property can sit comfortably inside the ATO's stated position and still be unfinanceable. Lender appetite should be settled first, in writing, on the specific property, before anyone spends money on a technical opinion.

The strategy this quietly makes more valuable

Business real property is excluded from the 5 per cent in-house asset limit, which allows a fund to own the premises its members' business trades from and lease them back at market rent on arm's length terms. It can also be acquired from a related party at market value under subsection 66(2)(b), which residential property never could. Rent that leaves the business as an expense arrives in the members' superannuation instead, taxed at 15 per cent in accumulation phase and nil on assets supporting a retirement phase income stream. For an owner who has paid a landlord for fifteen years, that is material rather than marginal.

The traps are familiar and unforgiving. Rent below market. No written lease. Any private use of the premises, which goes straight to the wholly-and-exclusively test. And on an in-specie transfer, stamp duty and capital gains consequences that vary by state and are routinely understated.

Worth raising before the client raises it: they will arrive assuming the gearing works the way it does in their own name. Twenty years of thinking about property through a negative gearing lens does not survive the trip into a fund, and the point lands better coming from you early than from a tax return later.

Three steps for the practice

First, run the list. Which clients have an SMSF holding property, or an SMSF and a stated intention to buy? That can usually be pulled in an hour, and given where the exposure sits it will be longer than you expect.

Second, have the conversation before they need it, and expect to repeat it. A short note is enough, and it should stop short of any view on the client's loan, which is not the accountant's call:

The rules on what a self-managed super fund can borrow to buy changed on 10 August. If your fund already owns property with a loan against it, that arrangement is protected and nothing changes. If you are considering buying another property inside the fund, the rules are now much narrower than they were, and the property itself needs checking before anything is signed.

That is accurate, it alarms nobody, and it puts the practice on the record.

Third, know your referral points, because there are three and they are not interchangeable. Whether a property satisfies subsection 66(5) is a compliance determination and belongs with a licensed SMSF specialist. Whether a lender will fund it is a credit question. Whether it is a sound asset at that price on those lease terms is a property question, and belongs with a property strategist rather than with the agent selling it. Confusing the three is how clients end up with a compliant purchase that was a poor investment, or a good asset nobody would finance.

One test of whoever you refer to, on any of the three: the useful ones tell clients not to proceed. If the answer coming back is always yes, that is information about the adviser rather than about the property.

Still unresolved

The SMSF Association has warned that business real property is a complex technical test never designed to act as a gateway for all super fund property borrowing, and that regional doctors, pharmacists, vets and motel operators frequently trade from mixed-use premises that will not qualify. The measure remains politically contested, so clients who need certainty should know the settings may yet move.

Separately, refinancing a pre-10 August arrangement is unaffected, and a fund rolling off a fixed rate onto a variable rate with the same lender is not entering a new arrangement at all. How far an arrangement can change and still be the same arrangement has not been spelt out, which is a question for the client's lender and SMSF specialist rather than their accountant.

The measure itself is small, expected to raise about $50 million over the forward estimates. The client conversations are not, because they land on the accountant first. What clients need is not an answer on whether the building qualifies. It is what to check, in what order, and who decides.

Rasti Vaibhav CFA is the founder and CEO of Get RARE Properties (https://getrare.com.au). He was previously a quantitative fund manager at Westpac and AMP Capital, where he oversaw institutional portfolios in excess of $2 billion.