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The Federal Government has agreed to support a proposed change that would restrict the ability of SMSFs to use limited recourse borrowing arrangements (LRBAs) to acquire residential property.

The change has not been introduced as a general ban on all SMSF borrowing. Based on the current announcements, the proposed restriction is directed at future borrowing arrangements used to acquire residential property.

What is being proposed?

The Government has agreed to support an amendment put forward by the Australian Greens to ban future limited recourse borrowing arrangements for residential property by superannuation funds.

In practical terms, this means SMSFs would no longer be able to enter into a new limited recourse borrowing arrangement to acquire residential property once the proposed rules commence.

At this stage, the proposal appears to apply to new arrangements only. Existing SMSF borrowing arrangements are expected to remain in place.

Who is bringing in the change?

The proposal has been driven by the Australian Greens as part of negotiations with the Federal Labor Government over the Government’s broader tax reform package.

The Albanese Government has agreed to support the Greens’ amendment, which means the measure is now expected to progress as part of that broader legislative process.

When would the change start?

The current announcement indicates that the change would take effect 45 days after Royal Assent.

This is important because the rules have not necessarily changed immediately. The final commencement date will depend on the passage of legislation and when Royal Assent occurs.

The Greens have indicated that the change will be prospective, that contracts signed before commencement should be protected, and that the 45-day delay is intended to provide time for arrangements already in progress to be finalised.

However, at this stage, the final legislation has not been reviewed, so it is not yet clear exactly how far a transaction will need to have progressed before the commencement date.

For example, it is not yet clear whether transitional protection will require only the property contract to have been signed before commencement, or whether other steps will also need to have occurred, such as:

• the bare trust or holding trust being established;
• finance approval being obtained;
• loan documents being signed;
• LRBA documentation being completed; or
• settlement having occurred or being sufficiently progressed.

Accordingly, trustees should not assume that signing a property contract alone will automatically be enough until the final transitional provisions are available.

Where an SMSF residential property LRBA is already in progress, trustees should seek advice and ensure the contract, finance arrangements, bare trust structure and LRBA documentation are progressed as far as possible before the commencement date.

What does this mean for existing SMSF property loans?

Based on the current announcements, existing SMSF limited recourse borrowing arrangements should not be affected.

This means SMSFs with an existing residential property LRBA should not be required to unwind that arrangement simply because of the proposed change.

However, trustees should continue to ensure their existing LRBA remains compliant with the usual SMSF borrowing rules, including:

• the loan remains limited recourse;
• the asset is held correctly through the required holding trust/bare trust structure;
• repayments are made in accordance with the loan terms;
• related party loans, where applicable, remain on arm’s length terms; and
• the investment continues to satisfy the fund’s investment strategy and sole purpose requirements.

Does this affect commercial property?

Based on the current wording of the announcement, the proposed ban is aimed at residential property.

It does not appear to prevent SMSFs from entering into LRBAs for commercial property or business real property, provided the arrangement otherwise complies with the SIS Act and general SMSF rules.

However, this should be confirmed once the final legislation is available.

Can an SMSF still buy residential property?

Yes, the proposal does not appear to ban SMSFs from owning residential property altogether.

The key restriction is on using a new limited recourse borrowing arrangement to acquire residential property.

An SMSF may still be able to acquire residential property without borrowing, provided the acquisition is otherwise permitted under the superannuation rules and is consistent with the fund’s investment strategy.

Why is the change being proposed?

The proposed change is driven by a combination of policy, risk management, and housing affordability concerns raised by both the Government and the Greens.

While LRBAs are currently permitted, they are an exception to the general rule that superannuation funds should not borrow. Policymakers have increasingly questioned whether borrowing to invest in residential property aligns with the long-term purpose of superannuation.

Key reasons behind the proposal include:

• Systemic risk concerns
  Borrowing introduces leverage into SMSFs, which can increase the risk of losses if property values fall or rental income is disrupted. This is particularly relevant for smaller funds with limited diversification.
• Member protection and retirement outcomes
  There is concern that highly leveraged property investments may expose members to concentrated risk, potentially impacting retirement savings if the investment underperforms.
• Consistency with superannuation policy settings
  Superannuation is generally intended to be a long-term, diversified investment vehicle. Allowing borrowing for residential property is seen by some policymakers as inconsistent with this objective.
• Housing affordability pressures
  The Greens have argued that SMSF borrowing for residential property may contribute to increased demand in the housing market, potentially placing upward pressure on prices and reducing affordability for owner-occupiers.
• Growth in SMSF borrowing activity
  Over time, there has been an increase in the use of LRBAs by SMSFs, particularly for residential property. This growth has prompted renewed scrutiny from regulators and policymakers.
• Regulatory and compliance complexity
  LRBAs involve complex structures, including holding trusts and strict compliance requirements. There is concern that some trustees may not fully understand or properly manage these obligations.

Overall, the proposal reflects a policy shift towards limiting the use of leverage within the superannuation system, particularly where it intersects with the residential property market.

What should your clients do now?

Trustees who already have an SMSF LRBA should not assume they need to take immediate action, but they should ensure their current arrangement remains properly documented and compliant.

Trustees who are currently considering an SMSF residential property purchase using borrowing should seek advice as soon as possible. The timing of the property contract, finance approval, bare trust documentation, loan agreement, LRBA documentation and settlement process may become important once the final rules are confirmed.

There has been some speculation that Royal Assent could occur as early as next week. While this has not been formally confirmed, it highlights how quickly the legislative timeline could move once the bill passes. If Royal Assent were to occur in the near term, the 45-day countdown to commencement would begin shortly after.

For trustees actively progressing a transaction, timing could become critical. Based on the current announcements, contracts signed before commencement are expected to be protected. However, until the legislation is finalised, trustees should not assume that signing a contract alone will be sufficient. Where possible, the broader LRBA process should be progressed as far as possible before commencement.

For accountants and advisers, it remains important not to present the change as law until the legislation has formally passed and received Royal Assent. A safer way to describe the position is that the Government has agreed to support a proposed restriction on future SMSF LRBAs for residential property, with timing and transitional details still subject to the final legislation.