The Federal Government has announced proposed changes that could significantly impact how Self-Managed Super Funds (SMSFs) invest in residential property.

As part of a broader package of tax reforms, the Government has agreed to ban new Limited Recourse Borrowing Arrangements (LRBAs) for residential property within SMSFs. An LRBA is the structure that currently allows an SMSF to borrow money to purchase an investment property. The proposal was introduced as part of an agreement with the Greens to secure support for the Government’s broader tax legislation.

What Is Changing?

If the legislation takes effect, SMSFs will no longer be able to take out new loans to purchase residential investment properties.

For example, an SMSF that currently has $500,000 in super and borrows $400,000 to purchase a $800,000 investment property would no longer be able to use that strategy for new residential purchases. Instead, the fund would need enough cash available to buy the property outright.

What Isn’t Changing?

Importantly, the proposed changes are not retrospective.

Existing SMSF property loans will remain in place and continue under the current rules. There will also be a 45-day transition period after the legislation receives Royal Assent for transactions already underway.

The proposed changes also do not prevent SMSFs from:

  • Purchasing residential property outright using available fund cash.
  • Borrowing to purchase commercial property through an LRBA.
  • Accessing the existing tax concessions available to SMSFs.

What Does This Mean for Investors?

For Australians who were considering using their super to purchase a residential investment property with borrowed funds, timing has become an important consideration.

At this stage, these are proposed legislative changes and the final rules will depend on the legislation being passed and its commencement date. However, anyone planning to use an SMSF borrowing strategy should understand how the proposed reforms could affect their options.

As with any major legislative change, seeking advice early can help you understand how the proposals may impact your retirement strategy and whether alternative approaches may be available.