Submission urges carve out for new builds from SMSF LRBA ban

The ATO released a guidance shortly thereafter stating that SMSFs can still borrow or maintain a borrowing under an LRBA to acquire an asset but the changes restrict real property assets to business real property.

It added that the changes do not apply if an SMSF entered into an LRBA to finance a real property acquisition before 10 August 2026 or maintains or refinances that LRBA on or after this date.

The joint submission offered five options to the government on the changes, in order of preference. 

The first option is to exempt new residential dwellings from the ban using the government’s own definition of a new residential dwelling in section 26 to 160 of the Income Tax Assessment Act 1997.

The federal budget papers stated that the government will limit negative gearing for residential property to eligible new builds so the benefits of negative gearing are aimed at investment that increase housing stock. 

The government recently passed negative gearing amendments through Parliament before consultation had ended.

The joint submission asked for this same test to be applied to the negative gearing and CGT reforms.

“This aligns the LRBA rules with the stated purpose of the budget package rather than working against it and requires no new drafting,” the submission said.

The second option tackled the ban that applies to any real property that is not business real property, and recommended that the government define and ban residential property directly.

It argued that the draft in its current form is broader than the announced policy as it catches more than residential property. It also includes vacant land, farmland not used in a business, and mixed-use property.

“If the policy target is residential property, the legislation should define residential property and ban LRBAs against that definition specifically,” the bodies said.

However, if option two is not adopted, they insisted the timing problem in the current ATO interpretation should still be fixed. It pointed out that according to this interpretation, a property that ceases to be business real property during the life of the loan places the fund in breach.

The ATO guidance states that the real property asset must continue to be business real property for the entire life of the LRBA, and as such, must be “wholly and exclusively” used in one or more businesses for the duration of the LRBA.

The submission called for the testing of the business real property status at acquisition only.

“[This] would give trustees certainty for the duration of the loan without changing the underlying policy intent,” the submission said.

In addition, the submission’s fourth option is to limit LRBAs to one at a time for SMSFs as “it would make sense to enable taxpayers to invest and plan as they desire”.

The submission’s fifth and final option proposes that the Australian Prudential Regulation Authority (APRA) introduce restrictions on loan-to-value ratios (LVR) permitted by financial institutions to slow the housing market and facilitate new builds. 

Furthermore, it suggested that APRA allow lenders to permit higher LVRs on new builds over existing dwellings

Commenting on the government’s policy proposal, IFPA president Kurtis Alaeddin said: “As it stands the measure reaches property outside the announced scope and can put trustees in breach through events they do not control. Any one of the five options would fix that.”