As part of the Federal Government’s latest tax reform package, the Government has announced proposed reforms that would prohibit Self Managed Super Funds (SMSFs) from using Limited Recourse Borrowing Arrangements (LRBAs) to purchase residential property. While SMSFs would still be able to purchase residential real estate using existing fund balances, borrowing to acquire residential property would no longer be permitted if the proposed legislation comes into effect.
Under the Government’s proposed reforms:
- Future SMSFs would no longer be permitted to borrow to purchase residential property through an LRBA.
- Existing SMSF residential property loans are expected to be grandfathered and remain unaffected.
- Under the current proposal, the changes are expected to commence 45 days after the legislation receives Royal Assent.
- Under the current proposal, the restrictions apply only to residential property borrowing, with commercial property borrowing arrangements remaining unchanged.
This means SMSFs can still invest in residential property, provided they have sufficient cash available within the fund. However, the ability to leverage borrowing to build a residential property portfolio through superannuation would effectively come to an end.
For many investors, purchasing residential property through an SMSF using a Limited Recourse Borrowing Arrangement (LRBA) has long been regarded as one of the most tax-effective ways to build long-term wealth for retirement.
Some of the key advantages included:
- Capital gains tax discount of one-third if the relevant asset had been owned for at least 12 months.
- Net rental income generally taxed at up to 15% during the accumulation phase
- Tax exemption on investment income received from assets that support a retirement phase income stream.
If you are considering purchasing residential property through an SMSF, now is the time to speak with a qualified financial adviser, accountant, SMSF specialist and mortgage broker to understand how the proposed reforms may affect your investment strategy, financing options and retirement planning.
Disclaimer
The information provided in this article is for general informational purposes only and reflects opinions based on current market information and publicly available sources. It does not constitute financial, legal, taxation or investment advice. The proposed reforms discussed in this article are subject to legislation being passed and may change before implementation. Readers should seek independent professional advice tailored to their individual circumstances before making any property or investment decisions.
