Where the law actually landed: SMSF borrowing after 10 August, and the Division 296 election nobody will remind you about

Current as at 20 August 2026. This article replaces our earlier commentary on Division 296, which was written while the measure was still in draft and no longer reflects the law as enacted.

Two things have changed the shape of self-managed superannuation in the space of six weeks. Borrowing to buy residential property is gone. Division 296 has started.

A good deal of what is being said about both is wrong, and some of it is wrong in ways that will cost people money.

The borrowing change is a business real property test

It is being reported everywhere as a ban on residential property in super. That is not what the amendment does, and the difference matters.

The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June 2026 and commenced on 10 August 2026. It amends the definition of acquirable asset in section 67A(2) of the Superannuation Industry (Supervision) Act 1993 (SIS Act) so that where a limited recourse borrowing arrangement is used to acquire real property, that property must be business real property. An LRBA is the structure that lets a fund borrow to buy an asset while the lender’s recourse is limited to that asset alone.

It applies only to arrangements entered into on or after 10 August 2026, and it does not restrict borrowing to acquire assets that are not real property, such as listed shares or units in a unit trust.

So the test is business real property. Not the property type. That catches people out in both directions.

Business real property is a use test

Commercial zoning does not satisfy it on its own. This is the single most misunderstood point in the market at the moment, and we are already fielding questions built on the wrong assumption.

Section 66(5) of the SIS Act requires the property to be used wholly and exclusively in one or more businesses. A commercially zoned property sitting idle is not being used in a business, and will not qualify. Equally, and this surprises people, residential property that is used wholly and exclusively in one or more businesses can still meet the definition, and so remains an acquirable asset under section 67A(2). Mixed use is where it fails. A shop with a flat above is partly residential, so it does not meet the wholly and exclusively test.

Two refinements are worth knowing, because they are commonly stated wrongly.

Vacant land is not automatically excluded. Following SMSFR 2009/1, the question is what activity occurs on the land, so land that is idle or dormant fails, while land genuinely used in a business can qualify.

And primary production land does not lose its character merely because an area not exceeding two hectares contains a dwelling used for private purposes, provided that private use is not the predominant use of the property. That carve-out sits in section 66(6), and a farming family told flatly that a homestead disqualifies the property has been told something incorrect.

The property must be business real property at the time the arrangement is entered into and the asset is acquired. That is the point at which the acquirable asset test is applied. Ongoing business real property status can still matter under other rules, the in-house asset exception for property leased to a related party among them, but that is a separate question from the borrowing gateway.

What is unaffected

Arrangements entered into before 10 August 2026 are unaffected and do not need to be unwound. Refinancing of those arrangements is also unaffected. Our reading, pending ATO guidance, is that this means refinancing the same borrowing over the same property. Where terms are changed so substantially that the original arrangement no longer exists in any real sense, there is a risk it is treated as a new arrangement, and that is a question worth putting to a lawyer rather than assuming.

A binding contract exchanged before 10 August 2026 can still proceed even if settlement or the borrowing itself happens afterwards. The word doing the work there is binding. What counts as an arrangement entered into is not defined, so a binding contract of sale is the safest anchor available. A contract subject to a condition that goes to whether it was ever formed is a different thing from one subject to a condition that might later end it, and off the plan contracts rescinded and replaced after 10 August carry genuine risk.

Establishing a fund, applying for finance, or holding a pre-approval before the date is unlikely, on its own, to constitute a pre-commencement arrangement.

A general reminder before the second half: this article is information about two changes in the law. It is not personal financial advice or legal advice, and whether any of it applies to a particular fund depends on that fund’s circumstances. Questions about a specific contract or arrangement are for a lawyer.

The Division 296 rate is higher than the number going around

Division 296 applies from 1 July 2026, so the 2026-27 income year is the first.

The enacted law is the Treasury Laws Amendment (Building a Stronger and Fairer Super System) Act 2026 (Act No. 8 of 2026), with its paired Imposition Act (Act No. 9 of 2026). Both received Royal Assent on 13 March 2026. It works from Division 296 fund earnings, an adjusted measure of fund taxable income. That replaced the earlier draft approach based on movement in total superannuation balance (the total value of a member’s interests across every fund they hold), which swept in unrealised gains. The articles you may have read here and elsewhere describing that draft method no longer describe the law.

On rates, be careful with the numbers that are circulating.

An additional 15 per cent applies to earnings attributable to a total superannuation balance above the large super balance threshold of three million dollars. A further 10 per cent applies to the component attributable to a balance above the very large super balance threshold of ten million dollars, giving a Division 296 rate of 25 per cent on that portion. The two tiers stack. The second does not replace the first. That sits on top of the tax the fund itself already pays, of up to 15 per cent. So the headline burden on the highest slice approaches 40 per cent, not 25. We have seen the 25 per cent figure quoted as though it were the whole story.

Both thresholds are indexed to CPI, so they rise over time. That is worth saying, because the absence of indexation was the headline flaw in the original proposal, and a reader who remembers that will assume these figures are fixed.

One technical note that is easy to miss: amounts relating to limited recourse borrowing arrangements are disregarded in working out total superannuation balance for Division 296 purposes.

The election nobody will remind you about

Section 296-50 of the Income Tax (Transitional Provisions) Act 1997 allows a fund to elect to reset the first element of the cost base and reduced cost base of its CGT assets to market value at the end of 30 June 2026, for Division 296 purposes only. The ordinary CGT position of the fund is untouched.

Six features of it deserve attention:

• It is all or nothing across the fund, and it is irrevocable.
• It must be made in the approved form by the due date for lodging the fund’s 2026-27 annual return.
• It applies to assets held at the end of 30 June 2026 and held continuously until immediately before the relevant CGT event.
• It reaches assets the fund holds directly, and assets held through a custodian or tax look-through arrangement, an LRBA bare trust among them, because those count as directly held. It does not reach assets held through an interposed entity, such as units in a unit trust or shares in a company.
• Every other element of the cost base and reduced cost base is reduced to nil. That is the point most commentary omits, and it can cause a fund to badly overstate its position.
• The election is not lodged with the ATO. It is made in the approved form and retained in the fund’s records, for five years after it becomes certain that no further CGT event can happen for the relevant assets (s 296-55 of the Income Tax (Transitional Provisions) Act 1997). In practice that can run a good deal longer than five years from the election.

That last one is the one to sit with.

Nothing in any lodgement system will prompt anyone to make it, and there is no rejection notice if it is never made. As at the ATO’s most recent update to its Division 296 guidance on 29 June 2026, the approved form itself had not been released, and it was still unreleased when we checked on 20 August 2026. So the position today is that a decision worth a great deal of money to some funds cannot yet be executed, will not be prompted, and is easy to forget by the time the form appears.

None of which means electing is the right answer. It is not automatically beneficial, it depends entirely on the fund’s assets and their position at 30 June 2026, and as a practical matter it commits the fund to tracking two cost bases for every asset indefinitely. That is an ongoing administrative obligation, not a form to file once.

Where this leaves you

On current settings, the simple geared residential fund is finished as a strategy. What remains is a harder, more technical kind of fund: business real property, existing borrowings that now sit under a permanent compliance spotlight, and balances near or above three million dollars where valuation discipline and the cost base decision genuinely matter.

If you have an SMSF with an existing borrowing. Nothing needs unwinding. The two things worth checking are that the arrangement still satisfies the test it was set up under, and, if you are contemplating a refinance, that it is a refinance of the same property rather than something substantial enough to look like a new arrangement.

If you were planning to borrow. The question is no longer whether the property is residential. It is whether it is used wholly and exclusively in a business at the time the arrangement is entered into. If you have a contract you believe was binding before 10 August, that is worth confirming with a lawyer rather than assuming.

If your balance is near or above three million dollars. The cost base election is the live decision, and nothing will prompt you to make it. It is not automatically worth making. It is worth working out, before the 2026-27 return falls due.

If you advise SMSF trustees. The business real property use test and the all-or-nothing shape of the section 296-50 election are the two points where the commentary in circulation is most often wrong.

Sources: Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (Act No. 49, 2026, C2026A00049, Federal Register of Legislation; Royal Assent 26 June 2026, commencing 10 August 2026), Schedule 5; Superannuation Industry (Supervision) Act 1993 (Cth) ss 67A(2), 66(5), 66(6); SMSFR 2009/1 (business real property); Treasury Laws Amendment (Building a Stronger and Fairer Super System) Act 2026 (Act No. 8, 2026, C2026A00008) and Superannuation (Building a Stronger and Fairer Super System) Imposition Act 2026 (Act No. 9, 2026, C2026A00009), both Royal Assent 13 March 2026, Division 296 applying from 1 July 2026; Income Tax Assessment (1997 Act) Amendment (Building a Stronger and Fairer Super System and Other Measures) Regulations 2026 (F2026L00726); Income Tax (Transitional Provisions) Act 1997 ss 296-50, 296-55; ATO, “About Division 296 tax for SMSFs” (ato.gov.au, last updated 29 June 2026).