The Federal Government has announced plans to stop Self Managed Super Funds (SMSF) from borrowing money in the future to purchase residential property.

If you're wondering whether this affects you, here's what you need to know.

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What is an SMSF?

A Self-Managed Super Fund (SMSF) is a private superannuation fund that you manage yourself, rather than having your retirement savings invested by a large super fund.

Many Australians choose an SMSF because it gives them greater control over how their retirement savings are invested. While SMSFs can invest in a wide range of assets, many Australian’s have used them to purchase residential investment properties.

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How Can an SMSF Borrow to Buy Property?

Unlike a regular home loan, an SMSF can only borrow under strict rules known as a Limited Recourse Borrowing Arrangement (LRBA).

These arrangements allow an SMSF to borrow money to purchase an investment property while limiting the lender's security to that specific asset.

Because of the additional legal and compliance requirements, SMSF lending is generally more complex than a standard home loan and requires professional advice from an accountant, financial adviser and mortgage broker.

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What Has the Government Announced?

Under the proposed changes:

• SMSFs will no longer be able to apply for a loan to purchase residential property.
• Existing SMSF property loans are expected to be grandfathered, meaning they will not be affected.
• SMSFs will still be able to purchase residential property using existing cash within the fund, they simply won't be able to borrow to do so.

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When Will the Changes Take Effect?

At this stage, the legislation has been announced but has not yet become law.

The proposed legislation still needs to pass through Parliament and receive Royal Assent before taking effect.

Based on the Government's announcement, the new rules are expected to commence 45 days after Royal Assent.

Until then, SMSF lenders can continue accepting applications under the current rules.

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Can I Still Purchase Property Through My SMSF Before the Changes?

Yes but timing is becoming increasingly important.

Current information indicates the legislation is intended to apply only to new borrowing arrangements after the commencement date.

This means borrowers who are already progressing with an SMSF property purchase can still proceed under the existing rules.

Importantly, based on the proposed legislation, it is expected that the contract date will determine eligibility, not the date the loan settles.

In practical terms, this means you will generally need to have:

• An SMSF established.
• A corporate trustee and borrowing structure in place.
• Finance arranged with an SMSF lender.
• A signed contract to purchase the property before the legislation commences.

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Because setting up an SMSF, establishing the required legal structures, obtaining finance approval and finding a suitable property can take several weeks, anyone considering this strategy should seek professional advice as soon as possible.

As the legislation is still progressing through Parliament, the final details and commencement provisions may change.

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What Should You Do?

If you were already planning to purchase an investment property through your SMSF, now is the time to speak with your:

• Accountant
• Licensed financial adviser
• Mortgage broker

They can help you understand how the proposed changes may affect your individual circumstances and whether there is sufficient time to complete the purchase under the existing rules.

Disclaimer: This article is general information onlyand should not be considered financial, legal or taxation advice. SMSFs arecomplex structures, and you should seek advice from appropriately qualifiedprofessionals before making any investment or borrowing decisions.

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