Commercial property was exempt from the ban, but its definition in the legislation could see SMSFs prevented from using LRBAs to purchase some types of commercial property.
Peter Burgess, SMSF Association chief executive, told SMSF Adviser that this reinforces the need for SMSF practitioners to understand the definition of business real property and the views expressed by the ATO in SMSFR 2009/1, on what constitutes business real property for the purposes of the SIS Act.
Additionally, the legislation also seems to exempt some types of residential properties such as those used as stock in a rental business, and as trading stock in a property development.
“The definition of business real property is a defined term which was inserted in the SIS Act over two decades ago to reduce the scope and risks associated with related party transactions,” Burgess said.
“Using this definition to determine what types of real property can be acquired under a LRBA introduces some interesting idiosyncrasies. For example, a residential property that is zoned residential and is used in a business could meet the definition, while a commercial property which is only partly used in a business would not ordinally meet the definition.”
Burgess added that while these distinctions may make sense in the context of the rules which prohibit an SMSF from acquiring an asset from a related party or leasing an asset to a related party, they may not make sense and may give rise to some unintended consequences in the context of the LRBA amendment.
Phil Broderick, principal of Sladen Legal, said the main issues created by the legislation to SMSFs using LRBAs to buy “residential property” is actually a ban on acquiring non-“business real property”.
“While the difference sounds semantic it can have important consequences such that some residential properties can be bought with LRBAs and some commercial properties cannot depending on whether they meet or don’t meet the definition of ‘business real property’,” Broderick said.
“The critical part of that definition is whether the property is solely used in one or more businesses, not what type of property it is. Hence, residential property can be used in businesses and is OK and if a commercial property is not wholly used in a business it is not.”
Jason Hurst, superannuation specialist for Accurium, said the BRP definition requires the property to be wholly and exclusively used for business purposes.
“Up until now we only needed to consider this BRP definition at the time of an acquisition from a related party or when leasing to a related party,” he said.
“Unless some other guidance or changes come out I’m not sure it’s even possible for an SMSF to borrow to purchase a brand new commercial property or a commercial property off the plan.”
After passing both houses of parliament, the legislation received Royal Assent. This means the ban will take effect from 10 August 2026.
Any existing LRBAs, including the refinancing of existing arrangements, and new arrangements entered into before 10 August (including those that settle after) will be grandfathered.
To ensure that any transactions currently in progress will be grandfathered, trustees and advisers will need to ensure that contracts are in place, and that all relevant entities, including holding trusts, are correctly established. Additional care will be needed during this critical transitional period and those impacted should consider seeking specialist legal advice.
