Graeme Colley, a respected educator, policy advisor, and technical expert with over 30 years’ experience in taxation and superannuation is back with a new blog post covering changes to LRBA.
The recent changes to the superannuation rules from 10 August which restrict a fund investing via limited recourse borrowing (LRBA) arrangements solely in business real property cannot be underestimated. They will have an ongoing impact on the residential property market, finance industry and the way a fund structures future property investments.
The new legislation includes a transitional arrangement that applies to contracts for residential property if the contract for the purchase has been signed before 10 August 2026. In these cases, even though some components of the LRBA may not be in place by the required time the arrangement will be taken as commencing prior the new law taking effect. This may include establishing the bare trust, the loan for the property purchase and the settlement for the property purchase. However, where the contract has been signed on or after 10 August 2026 the new rules will apply and any purchase for purposes of the LRBA will be limited only to investments in business real property.
As a general rule, ‘business real property’ is property used wholly and exclusively in a business. There are concessions where the property is used to carry on primary production activities which allows it to include up to 2 hectares that may be used for private or domestic purposes. The Commissioner’s opinion in SMSF Ruling 2009/1 may apply to allow the property to meet the business real property definition if it is used for non-business purposes that are incidental to its dominant use. Examples could include employees parking their privately owned cars on the employer’s business premises or a manager or employee residing in a motel or hotel premises where they are ‘on call’ overnight.
In some cases property used for domestic and residential purposes may meet the business real property definition if it forms part of a business of leasing. Residential property was considered to be part of a business of leasing in the cases of Allzams Trust and Commissioner of Taxation [2021] AATA 2767 and Allen and Commissioner of Taxation [2021] AATA 2768.
Use of a residential premises as business property could occur where an apartment in a residential block of home units is used wholly and exclusively to conduct a business, for example, a small medical practice, physiotherapist or similar undertaking. However, if the use of the property changes materially from that of carrying on a business to residential use and substantial modifications are required for that purpose, a breach of the LRBA rules may have occurred. The reason is that there has been a material change to the nature of the asset that was originally acquired.
When auditing an LRBA for the 2026-27 income year the fund’s auditor may need to take a closer look at any property that has been acquired under an LRBA by the fund during the year. Any review would consider the date of the signed contract for the acquisition of the property, the type of property acquired by the fund, and whether it is required to satisfy the LRBA requirements that applied up to 9 August or from 10 August . Other aspects of the audit will need to be met which will include the establishment of the bare trustee or holding trust, the borrowing arrangement and, in the case of related party loans, whether the safe harbour requirements have been satisfied.
If the fund wishes to invest in residential property it would need to be purchased by the fund without any gearing so that it is owned outright. In some situations it may be possible to use geared or ungeared unit trusts that may acquire the property. Absolute care needs to be taken in these situations and professional advice should be obtained to make sure the superannuation rules are satisfied at all times.
Use of a unit trust that is geared may be an option but it needs to ensure that the units owned by the superannuation fund satisfy the in-house asset test especially if related parties are also unit holders. If the fund and the related parties own greater than 50% of the units in the unit trust the value of the units will be treated as in-house assets and the fund will limited to investing no more than 5% of the fund’s total assets as in-house assets. This may create issues if the value of the units increase with an increase in the property’s value which must be at its arm’s length market value.
It is also possible to use an ungeared unit trust which requires the superannuation fund to acquire units in the unit trust and another party or parties purchase the remaining units. The unit trust, which is required to meet a number of complex rules, will hold the property without gearing as the full purchase price has been obtained from the amounts received from the purchase of units. This arrangement will allow the unit trust to own the property outright without the value of the units being included in the fund’s in-house assets.
Before considering the fund purchasing units in an ungeared unit trust it is essential that all of the rules applying are understood. These are very technical and if the trust breaches just one of the rules the value of the units will be included in the fund’s in-house assets. Once the rules for ungeared unit trusts have been breached there is no going back to correct any errors. For this reason specialist advice is necessary to ensure the unit trust complies at all times.
The ATO released draft and updated business real property and limited recourse borrowings rulings and guidelines in view of the change to LRBAs from 10 August 2026. Draft revisions have been made of rulings SMSFR 2009/1 and SMSFR 2012/1DC and are available from the ATO website .
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