Late last week, Mr Frydenberg said that banning LRBAs in SMSFs would be a “strong measure”.
When asked if the government would place restrictions on borrowing by SMSFs rather than banning it outright he responded with “correct”, as reported by Fairfax.
Mr Dunn said given the primary concern with LRBAs has been related to the issue of personal guarantees, and whether a personal guarantee affects borrowing being a truly limited recourse, this will be one area the government will target.
“It’s going back in some respects to the way the old legislation was written before it was changed in July 2010 when they introduced the ability to allow for guarantees,” he said.
“[This was largely] because it was a natural part of banking policy to ask for guarantees – the banks in a nice way snubbed their nose to the way the law was and said ‘Well this is the way we’re going to do it and we’re the ones who lend the money’.”
Mr Dunn said the way in which banks deal with a potential ban on personal guarantees would be an interesting development.
“Does that mean that they will just reduce loan-to-value ratios again or will we come back to this position that we were confronted with back in July 2010 when they changed the rules to the way they exist today?” said Mr Dunn.
“I think the levels in which the banks will lend will significantly drop.”
The natural response from the bank, he said, in mitigating the risk of having no personal guarantee will be to drop the level of loan-to-value ratio and to ensure loans are “paying for themselves, having much stronger capabilities and are serviced on a long-term basis”.
Related party loans, he said, are another area the government is likely to address given the associated problems that have surfaced in the past.
“If they do allow for related party loans they may just implement a prescribed interest rate like they’ve done with refunds of contributions or they’ll legislate to provide a commercial sense to it,” he said.
The ATO has already placed restrictions on related party borrowing, issuing two interpretive decisions in December last year which confirm that nil interest borrowings from related parties can cause non-arm’s length income.
Overall, Mr Dunn said Mr Frydenberg’s comments are a positive outcome for the SMSF industry.
“The reality is if borrowing in SMSFs needs a change and a tweak around how SMSFs can deal with borrowing for it to survive, I think we need to be accommodating for that,” said Mr Dunn.
Looks like the asst treasurer is getting it right. Keep LRBAs but make it safe and conservative.