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

Current as at 15 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 not a residential ban

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 so that where a limited recourse borrowing arrangement is used to acquire real property, that property must be business real property. 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 not the property type. The test is business real property, and that catches people out in both directions.

Business real property is a use test, not a zoning test

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. Commercial zoning does not satisfy that on its own. A commercially zoned property sitting idle is not being used in a business, and will not qualify. Equally, and this surprises people, residential property can qualify where it genuinely meets the test. The ATO has confirmed that residential real property meeting the business real property definition can still be acquired under a borrowing arrangement.

Two refinements 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 satisfy the test when the arrangement is entered into and throughout its life. It is not a hurdle cleared once at settlement.

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, though this means refinancing in respect of 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. 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 does not help.

Division 296: the rate is not what most people think

Division 296 applies from 1 July 2026, so the 2026-27 income year is the first. The enacted law, which received Royal Assent on 13 March 2026, 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, 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 threshold of ten million dollars, giving a Division 296 rate of 25 per cent on that portion. 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. It is not.

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.

Five features of it deserve attention, and the last two are the ones that catch people.

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, and the ATO indicates it is generally available only for directly held assets, other than through a custodian or look-through arrangement such as a borrowing trust. Every other element of the cost base and reduced cost base is reduced to nil, which is the point most commentary omits and which can cause a fund to badly overstate its position.

And this is the one to sit with. The election is not lodged with the ATO. It is made in the approved form and retained in the fund's records, with a five year retention requirement. 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. 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 trustees and their advisers

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. Those funds need administering by someone who is across the detail rather than the headline.

If you would like the underlying references, we are happy to provide them. If you are an adviser or accountant with a client question you want tested against the legislation rather than the commentary, that is what our technical team is for.

This article is general information only. It does not take account of your objectives, financial situation or needs, and it is not financial product advice or legal advice. Whether any of it applies to a particular fund depends on that fund's circumstances, and questions about a specific contract or arrangement should be referred to a lawyer. Information is current as at 15 August 2026 and superannuation law is changing quickly.