Thomson Reuters senior tax writer Stuart Jones said reform still looms large over the superannuation industry which has been thrust into the spotlight of the royal commission.
While SMSFs were excluded from the royal commission’s terms of reference, “horror stories [have] emerged about cases of inappropriate advice to establish an SMSF and borrow to invest in property” Mr Jones said in the 2018-19 Thomson Reuters Australian Superannuation Handbook.
“ASIC has also flagged concerns about property one-stop-shops targeting SMSFs to borrow to invest in property,” said Mr Jones.
“Accordingly, limited recourse borrowing arrangements (LRBAs) are expected to remain a compliance focus point during 2018-19 and require sophisticated planning to address the growing complexity.”
Speaking to SMSF Adviser, Mr Jones said one of the striking statements made by commissioner Kenneth Hayne in his opening address was that he would “be highly guided by the findings from the Murray Inquiry”.
“Obviously that inquiry recommended that limited recourse borrowing arrangements should be abolished. The government chose not to do that because the government thought at that time there wasn’t sufficient data to make that decision or at least the industry convinced the government of that,” said Mr Jones.
“I’d say that there’s probably still not enough evidence to indicate that there’s an issue with it growing into a bigger problem, if anything it’s been contained by a lot of what’s happened since then.”
Mr Jones noted that since that recommendation, the government has introduced integrity rules for around certain LRBAs and the total superannuation balance, and that the SMSF lending market has seen further tightening with further banks exiting completely.
“The royal commission has identified the issues [have] a lot more to do with inappropriate financial advice rather than the tool necessarily, which is limited recourse borrowing arrangements,” he said.
While the royal commission’s final report is not due until 1 February 2019, Mr Jones said the government has already moved to get on the front foot with further reforms.
“The superannuation industry will be hoping that the government does not overreact and throw the baby out with the bath water in response to these inquiries,” he said.
“For example, the problems identified by the royal commission around borrowings by SMSFs have largely revolved around inappropriate financial advice rather than the actual rules that allow SMSFs to borrow under strict conditions.”
Totally agree with Grant Abbott. The proposed changes to the NALI rules in Super Measures No 1 Bill 2018 appear to be disproportionate to the “integrity” issue they seek to address. As Grant says, the changes (still before the Senate) will capture non-arm’s length expenses in relation to a LRBA even if it was established before 1 July 2018. The wide interpretation of the NALI rules in [i]Allen v FCT[/i] makes it difficult to “untaint” future income (and capital gains) from a scheme that originally included a non-arm’s length element. SMSFs with existing related-party LRBAs including non-arm’s length expenses (such as a reduced interest rate) will need to bring themselves within the ATO safe habour terms in PCG 2016/5. Until the arm’s length status of the arrangement is re-established, impacted SMSF trustees should avoid triggering CGT events in relation to the asset. Otherwise, the ATO could look to tax the capital gain (and the income) at the NALI rate of 45%.
Once Labor are back in government which is now basically a sure thing, given the latest Lib’s internal blowup.
Then LRBAs are dead as Billy Shorten and his Union buddies at ISA hate them cause they loose money to SMSFs and LRBAs.
And have already said they stop LRBAs!!
Bye, Bye LRBAs a good strategy when used properly.
The big issue with LRBAs at the moment are the new NALI laws, which target transactions where the SMSF Trustee is getting a good deal. This includes one sided transactions. Importantly the NALI laws extend well beyond related party and third party LRBAs to any favourable deal the Trustee has entered into such as buying private company shares or units at a discount. The problem is that if a related party loan is less than market then the entire capital gain from the transaction is taxed at 47 per cent. And watch out as it is retrospective applying to all transactions but with force from 1 JUly 2018 only.
The big issue with LRBAs at the moment are the new NALI laws, which target transactions where the SMSF Trustee is getting a good deal. This includes one sided transactions. Importantly the NALI laws extend well beyond related party and third party LRBAs to any favourable deal the Trustee has entered into such as buying private company shares or units at a discount. The problem is that if a related party loan is less than market then the entire capital gain from the transaction is taxed at 47 per cent. And watch out as it is retrospective applying to all transactions but with force from 1 JUly 2018 only.
I whole heartily agree with the comments above. Its the advice not the tool of the LRBA. I have been advising in this space of complex advising for over 12 years plus. At Pinant, My company I knew about the area of Advice back in the early 2000’s, but felt at that stage that I didn’t have the expertise to advise. So I went out and got my qualifications and keep up to date. It would be a great pity when there are so many Australian that have a genuine love for property investment to be precluded because the advice was poor or because of property developers not approaching this the correct way.
Should never have been introduced.