In the months straddling the end of 2024 and the start of 2025, self-managed super fund (SMSF) property investors found themselves confronting two regulatory developments that, acting in tandem, redraw the financial calculus of buying property through a limited recourse borrowing arrangement (LRBA). On 1 November 2024 the Australian Prudential Regulation Authority (APRA) cut the residential mortgage serviceability buffer from 3.0 percentage points to 1.0 percentage point, immediately expanding maximum loan sizes by 25 to 30 per cent for an identical income stream. Six months earlier, the Treasury Laws Amendment (Better Targeted Superannuation Concessions) Act 2024 received royal assent on 28 June 2024, setting a 1 July 2025 start date for an additional 15 per cent tax on the earnings attributable to an individual’s total superannuation balance above $3 million (Division 296). The new tax catches unrealised capital gains on real property held inside super, transforming the after-tax economics of holding an appreciating asset beyond the $3 million threshold. Together, the softened borrowing rules and the looming tax shift have compressed what would normally be an unhurried accumulation decision into a short window — the 2024‑25 financial year — during which SMSF members can lock in assets under legacy tax settings while serviceability constraints are at their loosest since the rate‑hiking cycle began. With specialist non‑bank lenders still writing SMSF LRBA loans at up to 70 per cent loan‑to‑valuation ratio (LVR) on residential security and assessing repayment capacity at a floor rate as low as 5.50 per cent p.a. (incorporating the 1 per cent buffer), understanding the precise lending limits, safe‑harbour requirements and the interaction with Div 296 is now a prerequisite for any trustee considering an LRBA property purchase inside the fund.
How the LRBA structure operates in 2025
The bare trust and the limited recourse principle
An LRBA is created under s 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act). The SMSF trustee takes a beneficial interest in a single acquirable asset — typically real property — while a separate bare trustee holds legal title. The SMSF borrows from a lender, and the loan documentation must explicitly limit the lender’s recourse to the asset held in the bare trust. If the fund defaults, the lender can only seize and sell that asset; the fund’s other investments are not exposed. For this reason, lenders price SMSF LRBA loans above standard owner‑occupier facilities, and they impose conservative LVR caps and shading on rental income.
ATO safe‑harbour terms — PCG 2016/5
Where the lender is a related party (for instance, a family trust or a member’s private company), the ATO Practical Compliance Guideline PCG 2016/5 (last updated 4 July 2019) sets out safe‑harbour terms. If the loan interest rate, LVR and term fall within those parameters, the ATO will generally not apply the non‑arm’s length income (NALI) provisions to income derived from the property. The safe harbour prescribes:
- An interest rate no higher than the Reserve Bank of Australia’s indicator lending rate for standard variable housing loans plus 2.0 per cent per annum. With the RBA indicator rate for housing loans quoted at 5.25 per cent as at February 2025, the maximum related‑party rate under the safe harbour is 7.25 per cent p.a.
- Maximum LVR: 70 per cent for residential real property and 60 per cent for commercial property.
- Maximum loan term: 20 years (or the asset’s effective life if shorter).
- Personal guarantees are permitted but must not extend beyond the asset.
Arm’s‑length lenders, including all ASX‑listed banks and specialist non‑bank financiers, are not bound by the safe‑harbour rates, but they still price above standard residential loans. Variable rates for arm’s‑length SMSF loans have settled between 7.00 and 7.50 per cent p.a. through the first quarter of 2025.
The sole purpose test and permitted property usage
All SIS Act investment rules continue to apply. An SMSF cannot acquire a residential property from a member or a related party, and members (or their relatives) cannot reside in an SMSF‑owned property. A commercial property may be leased to a member’s business provided the lease is on arm’s‑length terms and a written lease agreement is in place. Any breach of the sole purpose test can expose the fund to penalties and disqualification of trustees, as well as loss of complying fund status.
The lending matrix: APRA’s buffer rollback, LVR caps and DTI limits
The 1 per cent serviceability buffer
On 1 October 2024, APRA released a letter to all authorised deposit‑taking institutions announcing that the serviceability buffer for residential mortgage lending would reduce from 3.0 percentage points to 1.0 percentage point, effective 1 November 2024 (“APRA finalises changes to serviceability buffer for residential mortgage lending”, 1 October 2024). While APRA’s prudential standard APS 220 directly governs banks, the same buffer methodology has been adopted by non‑bank SMSF lenders as an industry norm.
Taking a representative LRBA variable rate of 7.20 per cent p.a., a loan would have been assessed at 10.20 per cent under the old buffer. Under the new buffer, the assessment rate drops to 8.20 per cent, or the lender’s floor rate — whichever is higher. Most SMSF lenders, including Liberty and La Trobe Financial, apply a floor rate of 5.50 to 5.75 per cent p.a. in their credit models as at March 2025. For practical purposes, the assessment rate for an SMSF loan at current pricing is typically 7.20 per cent plus 1 per cent = 8.20 per cent, which still represents a 200‑basis‑point reduction from the pre‑November 2024 benchmark. On a 25‑year principal‑and‑interest loan, that reduction alone can lift borrowing capacity by approximately 28 per cent for the same rental and contribution income.
LVR limits by security type
The following LVR ceilings are representative of non‑bank policies in force during Q1 2025:
- Detached residential houses: 70 per cent, with some lenders accepting properties in regional locations subject to tighter postcode restrictions.
- Residential units: 65 per cent, often with a maximum building height of four storeys and a floor‑area requirement; some lenders push to 70 per cent only for post‑completion units in capital city postcodes.
- Commercial property (offices, warehouses, retail): 60–65 per cent, dependent on the quality and term of the lease. A lease to a related‑party business is permitted but generally results in a 60 per cent cap and stricter debt‑coverage ratios.
- Vacant land: 50–60 per cent, with a requirement that a fixed‑price building contract be executed within 12 months and the constructed property will meet post‑completion LVR limits.
These caps are applied to the lender’s valuation, not the purchase price, and valuations must be completed by a panel valuer. Buyers should budget for a 5–10 per cent valuation shortfall on off‑the‑plan purchases or unique dwellings.
Debt‑to‑income caps and rental shading
To contain risk, SMSF lenders impose a total debt‑to‑income (DTI) cap, typically 6.5 times, calculated as the annual loan repayments divided by the fund’s net serviceable income. Net serviceable income includes:
- Gross rental income from the subject property, shaded to 75 per cent for residential and 60 per cent for commercial with a lease of less than three years (or 75 per cent if lease term exceeds three years and tenant covenant is strong).
- 100 per cent of employer Superannuation Guarantee contributions and 100 per cent of member salary‑sacrifice contributions, provided the member is employed on a permanent basis and contributions are verifiable through a formal employment contract and recent pay slips.
- For self‑employed members, a two‑year history of contributions is typically required, with the lower of the most recent year’s contribution amount used.
A fund holding a single residential property with gross rent of $52,000 per annum, a shading factor of 75 per cent (net $39,000), combined member SG contributions of $27,500 (an employee earning $239,130 at the 2024‑25 SG rate of 11.5 per cent), and a proposed 25‑year loan of $700,000 at 7.20 per cent p.a. (annual repayments $59,544) would show a DTI of 0.89, comfortably inside the 6.5 cap. A second property would push the fund’s DTI higher, but with the lower buffer, many funds will find they can now service debt that was previously unattainable.
The 1 July 2025 pivot: Division 296 tax and property inside super
How Div 296 tax applies to an LRBA property
Schedule 1 of the Treasury Laws Amendment (Better Targeted Superannuation Concessions) Act 2024 (Cth), assented to 28 June 2024, introduces a Division 296 tax effective from the 2025‑26 income year. It imposes an additional 15 per cent tax on “earnings” attributable to the portion of a member’s total superannuation balance exceeding $3 million. The definition of earnings captures the annual movement in the fund’s value after adjusting for net contributions and withdrawals. For an LRBA property, this means that every rise in the property’s market value during an income year — even if unrealised — contributes to earnings and can trigger an extra tax liability.
Consider an SMSF holding a property bought via LRBA for $1.2 million. If the total balance for the relevant member is $3.6 million (60 per cent above the $3 million threshold) and the property appreciates by 5 per cent ($60,000) in a single year, the proportion of that $60,000 attributable to the excess balance is 0.167 ($600,000 ÷ $3,600,000), resulting in $10,020 of additional earnings subject to the 15 per cent tax. The extra tax would be $1,503 for that year. On a 10‑year hold with compound appreciation, the cumulative tax drag can run into the tens of thousands of dollars, eroding much of the concessional tax environment of super.
For smsf members with balances well over $3 million, the annual tax on notional gains creates a powerful incentive to reconsider holding high‑growth property inside the wrapper. Some investors are actively using the pre‑1 July 2025 period to acquire property that lifts the fund