Clients should avoid recklessly locking in property ahead of deadline, say experts
The bombshell government announcement banning SMSFs from using limited recourse borrowing arrangements (LRBAs) to purchase residential property has set off a frantic scramble among brokers and their clients, as they rush to lock in an investment property before the deadline approaches.
The Australian federal government confirmed the ban on Tuesday as part of a deal with the Greens to pass its Budget tax legislation through the Senate, leading to a deluge of criticism and outrage from the broking community.
Under the terms of the transition, contracts signed before the changes commence will not be affected, and a 45-day window after royal assent (when the broader Budget bill will be formally approved by parliament) provides further protection for arrangements currently in progress.
The Budget legislation is expected to pass the Senate before parliament rises on 2 July, placing the effective ban date in mid-August 2026.
A tight window
Mortgage broker Tom Newman (pictured, right)’s phone was ringing off the hook as soon as the seemingly out-of-nowhere announcement was made, with clients fretting over their planned SMSF property investments.
For Newman, whose brokerage Venture Finance operates out of Perth, Western Australia, the window is uncomfortably tight. "Most people sit between that sort of 30 to 60 day bracket once they get their pre-approval. That search does take between four to six weeks,” he said.
Newman is concerned that the deadline will cause some borrowers to make decisions that aren’t right for them, just so they get a deal over the line before it’s too late. But he warned against making rash decisions.
"Don't just jump into something because you think it's going to end and you might not be able to get in," he said. "That could be worse than missing out. Apply the same metrics you've always applied to look for property. If it's a good deal, by all means execute on it. If it's a bad deal and you're coming up to the deadline and you miss out, then so be it."
Newman said most of his established investor clients are already exploring structures such as trusts and holding companies, but he acknowledged these alternatives come with their own costs and complexities.
“At the end of the day all people are trying to do is just slightly get ahead – and that slightly getting ahead costs them more money in compliance, annual returns, and all the other garbage," he said. "We're just now forcing them into investing under structures they don't frankly have much experience or understanding in."
'King hit in the back'
Sunshine Coast-based broker Beau Flanders (pictured, left) – whose brokerage Zion Financial includes a financial advice arm – has spent years carefully preparing numerous clients for the moment they would be ready to pull the trigger on a residential SMSF purchase.
One of those clients had spent the past two years maximising contributions specifically to demonstrate to a lender they had the repayment capacity to service the loan. News of the SMSF lending ban came mere minutes after Flanders got off the phone with this client, who was finally ready to press go on a purchase.
Thankfully the 45-day grace period should see this client get over the line – but others may not be so lucky.
Flanders has seen the benefits of SMSF investing in plain black and white. One of his clients established an SMSF around three years ago. They settled on a residential property and shifted out of an industry fund. To date, that client's net position – combining the property and shares held within the fund – has grown from approximately $230,000 to around $520,000.
"That's like a 130% return in three years," Flanders said. "And that's the kind of impact that just getting the right advice and the right structure can have – just having one property, a residential property, which most mum and dad investors know and believe in."
Like many brokers, following the May Budget and the crackdown on CGT and negative gearing benefits, Flanders was optimistic of using SMSF lending as a viable workaround.
But following the bombshell Tuesday announcement, “it’s like you’re walking away from the fight and then you get king hit in the back”.
Despite the frustration, Flanders sees a silver lining. The complexity created by the ban – and the creative structuring alternatives that will emerge in its wake – will drive demand for skilled credit experts. "It does create the need for good brokers, good advisors," he said. "That's what it's going to come down to."
Money could move offshore
Son Pham from Rethink Financing raised another concern: the SMSF residential lending ban risks driving Australian capital offshore entirely.
"The incentive to invest and create wealth is just seriously sliding in this country," he said. "They're going to cause Australian money to go offshore – other markets that look a bit more favourable."
Pham cited New Zealand as a market that could be looked at as more favourable for Australian investors.
"Australians' confidence in trying to invest is like zero," added Pham. "No one wants to do anything because the government's just going to tax the hell out of us.”
