ATO issues guidance on new LRBA rules for SMSFs

The Australian Taxation Office (ATO) released new guidance for SMSFs affected by the looming limited recourse borrowing arrangement (LRBA) changes for residential property, with the SMSF Association (SMSFA) saying it provides important clarity for trustees ahead of the reform.

The ATO's new guidance outlines how the new rules will apply, including transitional arrangements for SMSFs that are already in the process of acquiring property using an LRBA. The changes take effect on August 10.

"The new guidance confirms that transitional relief turns on the exchange of a binding contract before August 10. However, this certainty may come at a cost for some trustees who have already undertaken substantial steps towards a transaction and incurred significant costs but are not yet in a position to exchange contracts," SMSFA chief executive Peter Burgess said.

"While a binding contract test provides a clear line, it risks leaving trustees who have acted in good faith without the protection they expected.

"The guidance is also helpful in confirming that genuine off-the-plan contracts exchanged before August 10 will be protected, even where finance is approved, settlement occurs, or the LRBA is entered into after commencement."

On June 25, the Albanese government agreed to a Parliamentary Amendment in a deal with the Greens to makes changes to LRBA provisions for regulated superannuation funds, making it part of the law.

The tweak was part of a larger tax reform to replace the 50% capital gains tax (CGT) discount for individuals, trusts and partnerships with cost base indexation and a 30% minimum tax rate on capital gains accruing on and after 1 July 2027. Negative gearing for residential property investments were also limited to new builds from 1 July 2027.

From August 10, SMSFs will only be permitted to use new LRBAs to acquire business real property. The changes apply regardless of whether the lender is a bank, non-bank lender or related party.

The ATO said business real property generally refers to land and buildings used wholly and exclusively in a business. Existing LRBAs and refinanced arrangements entered into before the commencement date will not be affected.

Burgess commented further practical and comprehensive guidance would be needed to help trustees and advisers navigate the new regime with confidence.

"The web guidance is a useful and timely response, but these reforms have also highlighted how heavily the industry now relies on SMSFR 2009/1, which has not kept pace with modern property and business arrangements," he said. This ruling explains the meaning and application of the term business real property in relation to SMSFs.

"We look forward to the ATO's review of SMSFR 2009/1 and hope it also provides greater certainty on how the business real property rules will apply in practice over the life of an LRBA, particularly as commercial circumstances and property uses evolve over time," he said.

A newly published report from the Australian Finance Industry Association (AFIA) found that more than 16,000 new residential SMSF loans were written in FY26 - which is nearly five times more than the ATO's average yearly estimate.

Ultimately, the AFIA found the government may be underestimated the size of the market impacted by the reform.