If you're considering using your self-managed super fund to acquire property in Blairgowrie, you need to understand that the rules changed in August.
New limited recourse borrowing arrangements for residential property are no longer permitted. Commercial property remains available, but the structure requirements are strict and the consequences of getting them wrong are expensive. The penalty for non-arm's length terms is a 45 percent tax rate on income from the arrangement.
What a Limited Recourse Borrowing Arrangement Actually Requires
A Limited Recourse Borrowing Arrangement is the only way an SMSF can borrow money. The asset must be held in a separate bare trust, your fund acquires a beneficial interest, and legal ownership transfers once the loan is repaid. If you default, the lender's recourse is limited to the asset in the trust, not other fund assets.
Consider a trustee who wants to acquire a commercial property on Point Nepean Road. The property is leased to a cafe operator. The SMSF borrows $600,000, and the property is held in a bare trust with the SMSF as beneficiary. Rental income flows to the fund. The loan is on arm's length terms with a major lender at current variable rates. The property qualifies as business real property because it's used wholly and exclusively in a business. The trustee engaged an SMSF specialist before signing any documents.
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The August Restriction on Residential Property
From approximately 10 August, new LRBAs can only be used to acquire business real property as defined in section 66 of the SIS Act. Residential property does not meet that definition. This is not a ban on SMSFs owning residential property. You can still acquire residential property with cash, subject to the usual related party and sole purpose rules. You cannot borrow to do it.
Existing residential LRBAs entered into before the commencement date are protected, including eligible refinancing. Whether an arrangement was entered into before commencement is a legal question that depends on the surrounding circumstances, not just contract exchange. If you're relying on transitional protection, obtain specialist legal advice.
Business Real Property Means Wholly and Exclusively
Business real property is land and buildings used wholly and exclusively in one or more businesses. The business doesn't need to be carried on by the entity holding the property. Whether a property qualifies depends on its actual use at the time of acquisition, not how it's marketed.
A mixed-use property in Blairgowrie with both commercial and residential components may not qualify. A primary production property with a dwelling on no more than 2 hectares can qualify under a specific concession, provided the main use is not domestic or private. If you're looking at a property with any residential element, the ATO's guidance in SMSFR 2009/1 should be reviewed before you proceed. For commercial property, SMSF property loans remain available provided the structure meets all legislative requirements.
The Single Asset Rule and What It Excludes
Borrowed funds must be used to acquire a single asset, or identical assets with the same market value that can be treated as one. Multiple titles cannot be acquired under a single LRBA unless they are distinctly identifiable as a single asset, meaning they are bought and sold together and have equal market value.
You cannot use borrowed funds to improve an existing asset. Loan proceeds can cover the acquisition cost, stamp duty, and establishment costs, but not capital improvements. If you already own a property in your fund, you cannot place it into an LRBA structure. Drawdowns for capital improvements are prohibited for arrangements entered into on or after 7 July 2010.
Arm's Length Terms Are Not Optional
The ATO publishes safe harbour interest rates for SMSF LRBAs under Practical Compliance Guideline PCG 2016/5. These rates are updated annually and apply to both real property and listed securities. If your LRBA does not meet arm's length terms, income from the arrangement may be assessed as non-arm's length income and taxed at 45 percent.
This applies whether you borrow from a bank or a related party. A related party can provide a personal guarantee to the lender, but their recourse must also be limited to the asset under the arrangement. For trustees considering SMSF loan refinance, the refinanced loan must relate to the same asset, maintain the limited recourse character, and meet arm's length terms.
Tax Treatment in Accumulation and Pension Phase
A complying SMSF is taxed at 15 percent on assessable income, including net capital gains. Where an asset has been held for at least 12 months, a one-third CGT discount may apply, producing a maximum effective rate of 10 percent on the discounted gain. The actual liability depends on the property's adjusted cost base, acquisition and selling costs, capital improvements, capital works deductions, capital losses, and the fund's overall tax position.
A capital gain is not automatically tax-free because your fund has commenced a pension. SMSFs can receive exempt current pension income (ECPI) on assets that support a retirement-phase income stream. Where assets are fully segregated as current pension assets, a capital gain on disposal is disregarded. Where the fund uses the proportionate method, the exemption applies only to the exempt proportion of the net capital gain, as determined by an actuarial certificate.
Division 296 Tax and the $3 Million Threshold
From 1 July this year, Division 296 tax applies where a member's total superannuation balance at the end of the financial year exceeds $3 million. An additional 15 percent tax applies to the proportion of earnings attributable to the amount above that threshold. Where the balance exceeds $10 million, an additional 10 percent applies above that higher threshold. Both thresholds are indexed.
Division 296 fund earnings are an adjusted amount of the fund's taxable income. A capital gain must be realised through a CGT event to form part of assessable income and the Division 296 earnings base. An unrealised increase in property value does not by itself produce assessable income or Division 296 fund earnings. LRBA amounts are disregarded when calculating a member's total superannuation balance for Division 296 purposes.
An SMSF could elect to make a CGT adjustment to the cost base of its CGT assets to market value as at 30 June. This election recognises accrued value prior to the commencement of Division 296 and applies to all CGT assets held directly by the SMSF at that date. Division 296 tax assessments for the current income year are expected to begin issuing in the second half of next year.
Related Party Leasing in Blairgowrie
Business real property leased between the fund and a related party of the fund is excluded from the in-house asset rules. This means your SMSF can acquire a commercial property and lease it to your own business, provided the lease is on arm's length terms at market value.
In Blairgowrie, where commercial property along the foreshore or near the village precinct may be suitable for retail, hospitality or professional services, this structure could allow a trustee to acquire premises for their own business while building retirement wealth. The property must still qualify as business real property under the wholly and exclusively test, and the lease must reflect market rent and terms. Any arrangement that does not meet arm's length terms exposes the fund to the 45 percent non-arm's length income tax.
If you're looking at commercial property loans to acquire premises for your own business through your SMSF, the structure and lease terms should be reviewed by a specialist before you proceed.
The legislative framework for SMSF borrowing is now split between commercial and residential property. The compliance requirements have always been strict, but the margin for error is smaller now. Call one of our team or book an appointment at a time that works for you.
Frequently Asked Questions
Can I still use my SMSF to buy residential property in Blairgowrie?
You can buy residential property with cash, but you cannot borrow to do it. From approximately 10 August, new limited recourse borrowing arrangements can only be used to acquire business real property. Existing residential LRBAs entered into before the commencement date are protected.
What does business real property mean for SMSF loans?
Business real property means land and buildings used wholly and exclusively in one or more businesses. The business doesn't need to be carried on by the entity holding the property. Whether a property qualifies depends on its actual use at the time of acquisition, not how it's marketed.
What happens if my SMSF loan is not on arm's length terms?
Income from an LRBA that does not meet arm's length terms may be assessed as non-arm's length income and taxed at 45 percent. The ATO publishes safe harbour interest rates under PCG 2016/5 that apply to both real property and listed securities.
Can I lease commercial property in my SMSF to my own business?
Yes, provided the property qualifies as business real property and the lease is on arm's length terms at market value. Business real property leased between the fund and a related party is excluded from the in-house asset rules.
How does Division 296 tax affect SMSF property investments?
From 1 July, Division 296 tax of 15 percent applies to earnings above $3 million in total superannuation balance. A capital gain must be realised through a CGT event to form part of the Division 296 earnings base. Unrealised increases in property value do not by themselves produce assessable income.
