Lawyer outlines ‘critical action’ on LRBAs post-FSI
In light of the Financial System Inquiry’s recommendation to ban LRBAs in super, one industry lawyer has outlined “critical action” trustees and their advisers can take to maximise their chances of engaging with the current borrowing allowances.
As reported in SMSF Adviser on Sunday morning, the FSI has recommended a prospective ban on direct borrowing by superannuation funds using limited recourse borrowing arrangements (LRBAs).
The move was unsurprising, given the default position of the FSI’s interim report suggested that leverage in superannuation is inappropriate and creates unnecessary vulnerabilities in the superannuation and financial system.
Organisations such as the SMSF Professionals’ Association of Australia have been supportive of the recommendation, despite suggesting current LRBA figures are no cause for alarm.
“We can appreciate the FSI’s position, if leverage in superannuation did grow to a level where it could be a threat to people’s retirement savings,” said SPAA’s director of technical and professional standards, Graeme Colley.
DBA Lawyers director Bryce Figot said while the FSI’s recommendations do not constitute law, there is a fair chance the government will implement some of the proposals.
He also noted the final report recommends a grandfathering arrangement whereby funds with “existing borrowing” arrangements should be permitted to maintain them.
Mr Figot said those who want to engage in LRBAs should do so as soon as possible so that they have an “existing borrowing” in place.
“At the risk of oversimplifying, in respect of the 2010 changes, the [LRBA] was typically viewed as coming into existence when a loan contract with the lender was signed. This time, the grandfathering language seems even clearer, with the inquiry using the term ‘existing borrowing’ rather than just ‘existing arrangement’.
“In short, I suspect the critical deadline to qualify for grandfathering will be when the loan contract is made.”
Therefore, there is a risk for SMSF trustees who have currently, or will shortly sign purchase contracts but have not signed loan contracts with lenders.
“The danger is that the law might change before the loan contract is signed, meaning that they might not be able to borrow to settle the property,” Mr Figot said.
“This could cause difficulties if the SMSF trustee was relying on borrowing to fund the settlement.”
Mr Figot noted this is a particular concern for off-the-plan purchases since it is common to sign a purchase contract when the property is not yet built or ready to settle.
“Banks typically will not approve finance and then sign loan contracts until after the property is substantially built, subdivided and ready … that is, one to two years in the future and again, there is a real possibility that the LRBA laws might have been repealed by then,” Mr Figot said.