If you’ve been considering buying an investment property through your Self-Managed Super Fund (SMSF), you’ve probably seen the headlines this week.
The Federal Government has agreed to ban new borrowing by SMSFs for residential property purchases as part of a broader deal to pass its tax reform legislation. In practical terms, this means SMSFs will still be able to own residential property, but they won’t be able to use a Limited Recourse Borrowing Arrangement (LRBA) to purchase it going forward.
For some people, this won’t mean much.
For others, particularly those using property as a key part of their retirement strategy, it’s a significant change.
First Things First: Don’t Panic
The most important thing to understand is that existing arrangements are expected to be protected.
If you already own a residential property inside your SMSF using an LRBA, current information suggests those arrangements will be grandfathered and won’t be affected by the change.
There also appears to be a transition period for transactions that are already underway, although we’re still waiting for the final legislation and implementation details. Current reporting suggests there may be a 45-day transition period after the legislation receives Royal Assent.
At the time of writing, the exact details around contracts already exchanged, funds already established, and applications currently in progress are still being clarified, but if recent legislation changes are anything to go by, exchanged contracts are likely to be honoured.
If you’re currently in the middle of an SMSF property purchase, now is the time to speak with your broker, accountant and solicitor to understand exactly where you stand.
How Big Of A Deal Is This?
From a broader property market perspective, probably not huge.
The Government has stated that SMSF borrowing represents less than 1% of residential property lending.
So this isn’t something that’s likely to dramatically impact property prices on its own.
However, for the people who do use SMSFs to invest in property, it’s obviously a very different story.
Many Australians have used residential property inside super as a way of building retirement wealth, particularly those who feel more comfortable with bricks and mortar than shares.
The Part That Often Gets Missed
Property investors are often portrayed as simply competing with owner occupiers.
But investment doesn’t just affect the person buying the property.
When investors put money into an area, they’re often helping fund new housing supply, renovations, maintenance, and improvements that can make suburbs more attractive places to live.
That doesn’t mean every investment is good or every policy change is bad. It simply means the impacts are often more complex than the headlines suggest.
What Happens Next?
At this stage, it doesn’t appear there’s enough opposition for this measure to be stopped.
So the focus now shifts from debating the change to understanding how it will work in practice.
The key things we’re watching are:
- The final commencement date
- How transactions already in progress will be treated
- Whether refinancing existing SMSF loans will continue to be allowed
- The exact definition of an arrangement being “in train”
As more details emerge, we’ll provide updates.
For now, if you’re considering an SMSF property purchase and haven’t started the process yet, the window may be closing quickly.
If you’re already part-way through, it’s important to get advice specific to your circumstances as soon as possible.
As always, this article is general information only and should not be relied upon as financial, tax or legal advice. SMSF strategies should always be discussed with appropriately qualified advisers before making any decisions.