LRBA grandfathering has contract grey area

The lack of extensive guidance for how an SMSF can acquire residential property using a limited recourse borrowing arrangement (LRBA) under new grandfathering rules raises questions as to whether the fund must be named as entering into the purchase contract, an SMSF legal specialist has noted.

DBA Lawyers director William Fettes said the explanatory memorandum to the legislation that introduced the LRBA ban and grandfathering period provided no detail at all, so ATO guidance was the only information that could be acted upon.

Speaking during an online presentation hosted by his firm late last week, Fettes noted the regulator had stated a qualifying pre-commencement arrangement was one where the SMSF had exchanged a binding contract to acquire residential property before 10 August 2026.

“It’s worth pointing out the ATO formulation lends itself to looking at a contract and asking: ‘Does the SMSF trustee need to be a named party as the legal purchaser under the contract?’” he said.

“If that’s true, I think that’s not especially workable based on jurisdictional vagaries of how this is all done.

“Looking at New South Wales and ACT, the practice is you have the bare trustee or custodian as the purchaser. In Queensland, you would have the trustee for the bare trust as the purchaser and would not necessarily have any reference to the SMSF or the SMSF trustee.

“I’m not sure the guidance is particularly feasible from a point of view if all the LRBAs in that state or territory are done in a certain way and the ATO’s guidance on an arrangement doesn’t conform to what is the [state or territory] convention.

“I don’t think that’s appropriate guidance, particularly where there’s no real material that would suggest an arrangement entered into requires the SMSF trustee to be named in the contract.

“There are potential grey areas here and you would really want the SMSF to be intended as the beneficial owner and purchaser.

“If you came to me for advice and didn’t have an SMSF prior to 10 August but now want to nominate an SMSF that is just established, that is on the dicey end of the spectrum.

“If the SMSF was intended to be the ultimate acquirer before commencement, and you’re nominating it now, you have got a position that it was an arrangement already entered into if there’s objective evidence that was what was intended.

“I do recommend if you have clients in situations that are in a hairy space, definitely get advice. The ATO’s website is not the law and you definitely want some comfort that it works.”