A specialist lawyer has pointed out the rules restricting an SMSF using a limited recourse borrowing arrangement (LRBA) to purchase residential property appear to clash with ATO guidance about what is considered business real property and may allow these acquisitions to occur if done at scale.
DBA Lawyers special counsel Bryce Figot said while the changes to section 67A of the Superannuation Industry (Supervision) Act will limit borrowing for property acquisitions within an SMSF to business real property, as defined in section 66, it may not close off borrowing for all residential-type property purchases.
“When people say a fund can no longer borrow to acquire residential property, that is not entirely true because there are a lot of things which are not business real property but are also not residential property and, conversely, there is residential property that is business real property,” Figot said during a recent online presentation.
He noted the latter may be the case where an SMSF plans to borrow to acquire a residential rental property from a member who owns 19 other residential rental properties.
“Example 14 of Self Managed Superannuation Funds Ruling (SMSFR) 2009/1 is where the ATO talks about what is and isn’t business real property,” he added.
“The ATO states that if you are in the business of renting out residential properties, even though the actual people in the house live in them for their homes, the homes themselves constitute business real property.
“The ATO also said for a residential real estate investor who owns 20 properties, their properties are going to constitute business real property because they have a big enough scale.
“If you stop and think about it, that’s pretty perverse. A small investor who wants to borrow to acquire just one residential property, they can’t do it, but someone who wants to invest in residential property big time and borrow and acquire 20 properties, they can do it.
“If the goal is to ban investors as much as possible from owning residential property, and for that residential property to be available for people who are going to live in it to own, maybe this is poorly drafted legislation.
“The point is if you have a client who owns 20 residential properties in their SMSF, based on example 14 of SMSFR 2009/1, they can still borrow to acquire it.”
Jason Spits
SENIOR JOURNALIST
Jason is a senior journalist with Benchmark Media and writes for the selfmanagedsuper website and magazine and smstrusteenews website. He has covered financial services since 1999 and has written about life insurance, superannuation, investment management and financial advice, in both a freelance and in-house capacity, and also did a brief stint as a media manager for an industry association. He has been the editor of trade titles Money Management and Financial Standard, and was most recently senior journalist with life insurance title Riskinfo.
Articles by Jason