SMSF Property Isn't Dead – But the Rules Are Changing

photo credit Grand Warszawski / shutterstock.com

The federal government has agreed to ban new limited recourse borrowing arrangements (LRBAs) for residential property inside self-managed super funds (SMSFs), as part of the deal to pass its recent broader tax package.

At first glance, the headlines make it sound like SMSF property investing is over. It isn't. The changes apply only to new residential property borrowing and are prospective, meaning existing arrangements are protected. Like the changes to negative gearing outside super, current loans are grandfathered.

If you're already in the process of purchasing a residential property through your SMSF, there is also a 45-day transition period to finalise the lending arrangements. Settlement itself can occur after that period, provided the finance has been put in place within the transition window. While residential property has dominated much of the discussion, the more significant point for many business owners is what hasn't changed.

The new rules do not affect commercial or business real property. One of the most effective long-term wealth strategies available to many business owners remains intact: purchasing your own business premises through an SMSF and leasing the property back to your trading business on commercial terms. It allows rent that would otherwise be paid to a third-party landlord to help build wealth within the concessionally taxed superannuation environment.

Should you still be paying someone else's mortgage, or could you be building your own wealth instead?

There is another important aspect of the tax changes that has received far less attention. The government has replaced the proposed 50% capital gains tax discount on personally held investments with a cost-based indexation method. However, the concessional tax treatment of assets held within superannuation has not changed. That means the tax advantages of investing through super have become relatively more attractive than investing personally. In other words, the gap has widened.

As always, every situation is different. Whether an SMSF strategy is appropriate depends on your objectives, cash flow, borrowing capacity and long-term plans. But despite the headlines, SMSFs remain an extraordinarily powerful vehicle for building wealth—particularly for business owners.

If your business pays rent every month, it may be worth asking a simple question: Should you still be paying someone else's mortgage, or could you be building your own wealth instead?

If you'd like to explore whether owning your business premises through an SMSF could be appropriate for your circumstances, we'd be happy to have a conversation.