The recent budget announcements regarding changes to the capital gains tax have now passed both Houses of Parliament and are awaiting Royal Assent before becoming law.  In order to get the legislation passed the Federal Government made a deal with the Greens to restrict Self-Managed Superannuation Funds (SMSFs) from acquiring residential property through the use of limited recourse borrowing arrangements (LRBAs).  This marks a fundamental shift in how SMSFs can invest in residential property.

What has changed

The legislation removes the ability for SMSFs to enter into new borrowing arrangements to acquire residential property.  All existing arrangements will be grandfathered and can remain in place.

There will be  a short transition period of 45 days from when the legislation receives Royal Assent for transactions which are already under contract to proceed under the previous rules.  After that transition period has concluded purchasing residential property involving borrowed funds in your SMSF is off the table. Importantly, these changes are targeted at residential property only and SMSFs will still be permitted to borrow to acquire other types of investments, including commercial property, provided that the borrowing arrangement and investment complies with other superannuation laws.

A niche strategy removed

The acquisition of any investment by a SMSF using borrowings is tightly regulated and comes with additional establishment and ongoing compliance costs.  Borrowing within SMSFs has always been a relatively small part of the overall property and superannuation landscape  and represents only a modest share of both housing finance and SMSF assets.  Removing this pathway may limit flexibility for some investors looking to build retirement wealth through property inside SMSF, however it is unlikely to materially shift the overall balance between housing supply and demand.

What it means for housing and the rental market

At a high level, limiting investor activity is often seen as a way to improve affordability for first home buyers, however in reality this will not solve the fundamental issue of a housing supply shortage.

Australia continues to see strong population growth alongside constraints in construction, planning and delivery of new housing.  In that context, restricting a relatively small segment of investor activity is unlikely to address the underlying supply imbalance.

There is also a secondary effect to restricting investment in the property market by SMSFs.  Members of a SMSF are prohibited from using a residential property for their own personal use and must lease the property on arm’s length terms, contributing directly to rental supply.

Reducing SMSF participation in this part of the market may, over time, slow the addition of new rental stock., which is already in short supply.  Where demand remains strong and supply constrained, this pressure is more likely to appear in rents before any meaningful impact on property prices.

Policy direction and ongoing uncertainty

This change is the latest in a series of policy adjustments impacting superannuation funds, property and investment structures in general.  Over recent years, we have seen continued debate around tax settings, superannuation rules and borrowing frameworks.  While each change may be justifiable, by the politicians in isolation, the cumulative effect is an environment of uncertainty when it comes to long term planning and structuring.

For SMSF trustees, this reinforces the importance of regularly reviewing your fund and investment strategies in order to assess and make changes in the event of further regulatory changes.

What you should consider next

For individuals who had been considering an SMSF borrowing strategy, this change is a clear signal that that the Government, or in particular the Greens, do not like this type of strategy.  You are now going to have to consider alternative investment structures or delay building your wealth.

If you have already entered into a transaction to acquire a residential property in your SMSF using a borrowing arrangement you need to ensure that it is completed within 45 days from the date that the legislation receives Royal Assent.

Our view

Despite yet another change to the superannuation laws, we are of the view that investing through a SMSF still remains a viable structure to manage your investments.  There are many benefits unrelated to tax that make the use of SMSFs a viable alternative to investing in your own name.

As always if you are exploring making any type of investment or considering establishing a SMSF, you should obtain personalised financial advice from a licenced financial adviser.

If you would like to understand how these changes may impact your position please reach out to your CIB advisor.