New guidance from the Australian Taxation Office has confirmed that LRBA-funded property must remain business-use compliant for the full loan term.
The Australian Taxation Office (ATO) has released detailed guidance confirming that self-managed super funds (SMSFs) will only be able to use limited recourse borrowing arrangements (LRBAs) to acquire real property that qualifies as business real property at the outset - and continues to meet that test for the full term of the loan.
In its new guidance, released ahead of the government ban on LRBA lending for residential property, the ATO spelled out that the business‑use requirement applied at the moment the LRBA was entered into.
“The real property asset must be business real property at the time the LRBA is entered into. That is, the asset must be wholly and exclusively used in one or more businesses at the time of the LRBA,” it said.
The regulator made clear that this was not a one‑off test, and explained that business use must be maintained for as long as the LRBA exists.
“The real property asset must continue to be business real property for the entire life of the LRBA. This means the asset must be wholly and exclusively used in one or more businesses for the duration of the LRBA,” the guidance read.
“If the asset does not meet these rules, the SMSF has breached the law against borrowing and compliance action may apply.”
The ATO also addressed what would occur if a commercial property’s use changed during the LRBA, drawing a distinction between normal leasing activity and a more fundamental shift away from business use.
“If a real property asset stops being business real property during the LRBA, then the SMSF fails to maintain the LRBA according to the rules. The SMSF has breached the law against borrowing and compliance action may apply,” the ATO said.
It clarified that a temporary vacancy would not, on its own, cause a compliant commercial property to fail the test.
“If the property is land on which commercial premises are leased, the property will not stop being business real property only because the owner is looking for a new tenant,” it outlined. ‘
"However, if the owner abandons plans to lease the property, the property will no longer be business real property.”
Residential property, primary production and lender type
The ATO confirmed that residential assets were not automatically excluded, but needed to genuinely meet the business real property definition to be LRBA‑funded.
“If the residential real property meets the definition of business real property, these can be acquired and financed under an LRBA,” it noted.
It reiterated that for standard residential investment holdings that do not qualify as business real property, borrowing would be off limits.
“Alternatively, an SMSF can still invest in residential real property that is not business real property (provided it meets all other regulatory rules), but it can't be financed under an LRBA,” the guidance stated.
The ATO further explained how primary production properties with a residence could still qualify, provided domestic use was limited and not predominant.
“Real property used in a primary production business and containing a dwelling for private or domestic purposes can still meet the requirements of being used wholly and exclusively in a business (and therefore be business real property) if any dwelling used for private or domestic purposes is in an area of land no more than 2 hectares, and the main use of the whole property is not for domestic or private purpose,” it said.
“The changes apply where the arrangement is an LRBA, regardless of whether the lender is a bank, non-bank lender or related party.”
Timing, transitional relief and concerns
The SMSF Association welcomed the guidance while flagging areas where trustees may still face uncertainty or hardship.
“We acknowledge the ATO has moved quickly to provide guidance, especially on what it means to have ‘entered into an LRBA’ before 10 August for the purposes of the transitional arrangements,” SMSF Association CEO Peter Burgess said.
Burgess noted that the ATO had now confirmed that transitional relief hinged on when a binding contract to acquire property was exchanged, and explained the benefits and shortcomings of that approach.
“The new guidance confirms that transitional relief turns on the exchange of a binding contract before 10 August.
However, this certainty may come at a cost for some trustees who have already undertaken substantial steps towards a transaction and incurred significant costs but are not yet in a position to exchange contracts,” he said.
He warned that this may disadvantage trustees who had acted in good faith but fell narrowly short of the technical test.
“While a binding contract test provides a clear line, it risks leaving trustees who have acted in good faith without the protection they expected,” he outlined.
At the same time, Burgess welcomed confirmation that off‑the‑plan purchases could still benefit from transitional relief where contracts were exchanged before the change date, even if finance and settlement occur later.
However, he argued that substantial uncertainties remained around what would occur when a contract varied after exchange.“Further guidance is needed on the types of post-exchange contract variations that may be significant enough to be treated as a new arrangement,” he said.
“Given that commercial variations commonly arise between contract exchange and settlement, greater certainty is needed on how the Commissioner will approach these situations.”
[Related: Bluestone flags major trends reshaping borrowers and credit]
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