Key Highlights

• Generally no. From 10 August 2026, real property acquired through a new LRBA must be Business real property.

• No. SMSFs may still buy residential property without borrowing, subject to the ordinary SMSF rules.

• Pre-10 August 2026 arrangements and qualifying transitional cases may continue under the grandfathering provisions.

• Broadly, it is real property used wholly and exclusively in one or more businesses, as defined under the SIS Act.

For more than a decade, geared residential property has been a defining feature of many SMSF Investment strategies. That era has narrowed sharply. Schedule 5 of the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 restricts the type of real property an SMSF can acquire through a new limited recourse borrowing arrangement (LRBA). The measure is enacted law, not a proposal, and it commenced on 10 August 2026. This deep dive walks through exactly what Schedule 5 does, how "business real property" is defined, and how the transitional provisions preserve arrangements already in train. The detail matters, because the boundary between a permitted and a prohibited borrowing now turns on the character of the asset and the timing of the arrangement.

What Schedule 5 actually does

The Tax Reform No. 1 Act received Royal Assent on 26 June 2026. Schedule 5 amends the borrowing provisions so that a new LRBA can be used to acquire real property only where that property is "business real property" within the meaning of the SIS Act 1993. Because residential property does not meet the business real property test in ordinary circumstances, the effect is that residential property can no longer be acquired through a new LRBA from the commencement date.

It is worth being precise about what has and has not changed. The general prohibition on super funds borrowing remains in the SIS Act, with LRBAs continuing to operate as the principal exception. Schedule 5 does not abolish LRBAs; it narrows the class of real property that a new LRBA may fund. Nor does it disturb an SMSF's ability to hold residential property acquired without borrowing. The reform is targeted at new gearing over residential assets, not at property ownership in general.

The commencement line: 10 August 2026

The single most important date is 10 August 2026. The restriction applies to LRBAs entered into on or after that day. An LRBA entered into before it is unaffected. This makes the moment an arrangement is "entered into" the pivotal question, and it is why the transitional provisions are drafted around timing as much as asset type.

Business real property, defined

The pivot of the new rule is the SIS Act concept of business real property. In broad terms, it means an interest in real property (land and any fixtures) that is used wholly and exclusively in one or more businesses carried on by an entity. The "wholly and exclusively" requirement is strict: incidental or predominant business use is generally not enough, and the property must be used in the running of a business rather than merely as a passive investment. Standard residential rental property, let to tenants as a home, does not satisfy this test because letting residential premises is not ordinarily the carrying on of a business of that character. That is why residential housing falls outside the new borrowing pathway, while commercial premises used in a business — a warehouse, a shopfront, consulting rooms, a factory — can continue to be acquired through a new LRBA.

Transitional and grandfathering provisions

The legislation preserves three categories of arrangement, which the ATO has confirmed in its SMSF newsroom guidance. First, LRBAs entered into before 10 August 2026 continue unaffected, so existing residential LRBAs are not disturbed and can run their course. Second, refinancing of a pre-10-August 2026 LRBA is permitted, allowing trustees to move an existing borrowing to a new lender or new terms without losing grandfathered status. Third, binding contracts to acquire real property exchanged before 10 August 2026 are protected, even where the contract settles or the LRBA is formally entered into after that date. This third limb is significant for buyers who had exchanged before commencement but were still working through settlement.

Hypothetical example

Consider the Barton Super Fund. In July 2026, its trustees exchanged binding contracts to buy a residential unit off the plan, with settlement scheduled for October 2026 and an LRBA to be finalised at settlement. Because the binding contract was exchanged before 10 August 2026, the arrangement falls within the transitional protection, and the LRBA can proceed at settlement. By contrast, a second fund that had only obtained Loan pre-approval and had not exchanged by 10 August cannot now enter a new residential LRBA. The difference is not the asset — both are residential — but the timing and the existence of a binding contract. This example is illustrative only and not advice.

Risks and mistakes to avoid

The most common error will be assuming a deal is protected when it is not. Verbal agreements, expressions of interest, and unconditional pre-approvals are not binding contracts. Trustees should also avoid assuming that a property with some commercial character automatically qualifies as business real property; the wholly-and-exclusively test is demanding, and mixed-use or part-residential premises can be caught. Attempting to restructure an existing residential LRBA in a way that constitutes a new arrangement could inadvertently forfeit grandfathering. Given the consequences of an invalid borrowing, trustees should confirm the character of any asset and the timing of any arrangement before proceeding.

What trustees should watch next

Trustees with LRBAs in progress should document the date and nature of any binding contract carefully, as this may become the evidence that establishes grandfathered status. Those contemplating refinancing should confirm that the underlying LRBA predates 10 August 2026. And all trustees should monitor ATO guidance, which may elaborate on edge cases such as what constitutes "entered into" and how the business real property test applies to particular property types.

Conclusion

Schedule 5 marks a decisive narrowing of SMSF property gearing. Residential property is now off-limits for new LRBAs, business real property remains available, and a set of transitional rules protects arrangements already under way. The rules are precise and unforgiving of loose timing, so trustees may wish to seek appropriately qualified professional advice before relying on any exception.