Hot on the heels of the legislation itself, the ATO has now published its guidance on the changes to limited recourse borrowing arrangements (LRBAs), confirming how it intends to administer s 67A(2)(c) SISA from commencement on 10 August 2026.
Read the ATO guidance (QC107811)
Where our earlier piece, The LRBA Residential Property Ban: What It Means for SMSFs, dealt with the “what,” this update deals with the “how” — and there’s considerably more detail in it than a single headline suggests. For anyone with a client currently negotiating a property purchase, or simply trying to work out whether an existing arrangement is caught, it’s worth working through carefully.
LRBAs are restricted, not banned
The ATO is at pains to make one thing clear: LRBAs are not banned. SMSFs can still borrow, or maintain an existing borrowing, to acquire an asset, and none of the other exceptions to the general prohibition on SMSF borrowing have been touched. What changes from 10 August 2026 is narrower and more specific: any new LRBA entered into to acquire real property must be for business real property.
It is also important to note that the change in law does not impact who can be the lender – this is an asset-based restriction, not a lender-based one, meaning that LRBAs can continue via banks, non-bank lenders and related party loans. We may see the ATO update their PCG 2016/5 guidance regarding the safe harbour rules for related party loans, covering new arrangements against those that are grandfathered.
What counts as business real property
Business Real Property (‘BRP’) generally means land and buildings used wholly and exclusively in one or more businesses — a test unpacked in detail in SMSFR 2009/1. Whilst valuable guidance in understanding what property meets the business-use test, it is reasonable to assert that this ruling is out of dated in the context of modern property and business arrangements.
With LRBA eligibility now turning squarely on that definition, it would appear prudent for the Regulator to undertake a review the ruling itself — not just the transitional guidance sitting around it — and provide certainty on how the business real property test should apply as commercial circumstances and property use has evolved over the life of an LRBA.
The property must qualify at the start — and stay qualified
This is where the guidance gets genuinely important for ongoing compliance. Real property must be business real property:
- at the time the LRBA is entered into; and
- for its entire life.
Fail the test at inception and the fund has breached the borrowing prohibition (s67. SIS Act) outright. Fail it partway through — because the property’s use changes — and the fund has failed to maintain the LRBA under the arrangement, which is treated the same way. Any breach will result in potential compliance action by the ATO.
To understand this further, the ATO provides a practical example in their guidance.
If a property is land on which commercial premises are leased, the mere fact that the owner is between tenants and actively looking for a new one won’t tip the property out of its BRP status. But if the owner abandons plans to re-lease the premises altogether — repurposing the property, mothballing it, or shifting intent — it will cease to be BRP from that point, and the LRBA will no longer be validly maintained.
The lesson for trustees and advisers here is to document intention, not just occupancy, particularly during any vacancy period..
Grandfathering — generous, but with a clear trigger point
Existing LRBAs financing real property acquired before 10 August 2026 are unaffected. That protection survives maintaining the arrangement and also survives refinancing — but only where refinancing means a new loan contract for the same asset. Change the asset, and you’ve started a fresh arrangement subject to the new rules.
More significantly, a binding contract to acquire real property exchanged before 10 August 2026 preserves its grandfathered status even if settlement, and the LRBA itself, occur afterwards. Later variations generally won’t disturb this — unless the variation is so substantial that the fundamental terms no longer exist, in which case the ATO may treat it as a new arrangement. This is squarely relevant to the off-the-plan property acquisitions, where finance approval and settlement typically occur well over a year after exchange: on the ATO’s view, the (contract) exchange date is what matters, not settlement.
This has been the primary concern for advisers and trustees – the confirmation of having a binding contract in place gives certainty, but that certainty may also come at a cost for some trustees who have already undertaken substantial steps towards the real property acquisition and incurred significant costs but aren’t yet in a position to exchange. In this instance it risks leaving trustees who have acted in good faith without the protections they expected making such an important investment decision.
Further feedback is already being sought by industry as to how far a contract can be varied after exchange before the Commissioner treats it as a new arrangement altogether — a live issue given how routinely commercial terms shift between exchange and settlement on any reasonably complex acquisition.
Residential property isn’t off the table — LRBA financing of it is
To be clear, none of this stops an SMSF investing directly in residential real property. Provided the usual investment rules are satisfied — sole purpose, arm’s length dealing, and so on — a fund can still hold residential property outright. What it can no longer do, from 10 August 2026, is use an LRBA to finance a residential property acquisition unless that property can satisfy the BRP definition (which, for most residential property, it won’t). It will be interesting to see how current non-bank lenders in the market that operate in this space look at these the interpretation of BRP and any external reliance of meeting the definition before proceeding – e.g. a person in the business of running a portfolio of residential properties meeting the BRP definition (as per SMSFR 2009/1).
The takeaway
For advisers, the message from this guidance is really about timing and documentation. Anything intended to settle as an LRBA-financed residential purchase needs a binding contract exchanged before 10 August 2026 — after that date, the BRP test applies without exception, irrespective of lender.
For existing arrangements, keep clear records of the asset’s business use, particularly through any vacancy or transition period, since the ATO has now made explicit that a change in use — not just a change in ownership or financing — can trigger a breach. With a spike in activity prior to the law change, it is crucial that timing, expectations and contracts are all in place!
