Speaking to SMSF Adviser, LightYear Docs director Grant Abbott said SMSF loans is one area of super that could potentially be hit by surprise measures in the federal budget next month with Labor dealing with a significant budget deficit at the moment and looking for tax savings.
Labor previously proposed a ban on limited recourse borrowing arrangements in SMSFs in the lead up to the 2019 election, which was won by the Coalition.
The ban was proposed back in 2017 as part of a housing affordability package.
Treasurer Jim Chalmers stated earlier this year that Labor would not be proceeding with previous policies from the 2019 election such franking credit changes but has more recently stressed the need to tackle the huge deficit and address the shortage of housing.
Mr Abbott said he “wouldn’t be surprised” if a proposal to ban SMSF loans pops up again in the upcoming October budget.
“There’s a lot of arguments that they could potentially raise for it,” he said.
“Number one is that it’s a good tax saving for them. On the other side of that they could say that SMSFs have been pulling investment properties out that could be used for first home buyers.
“My gut feel is that we are pretty close to seeing some major changes for SMSFs and that the first one is going to be borrowing.”
If Labor does go in this direction, Mr Abbott said they may either look to undertake a review into SMSF borrowing first or make moves to legislate it quickly.
“It’s just one of those measures that looks too good, there’s not much downside [for Labor] in going down that direction,” he said.
One of the other measures that the government could potentially look to introduce, said Mr Abbott, is increasing the underlying tax rate for death benefits.
“When you think about the fact that there’s probably going to be a good $300 to 400 billion that’s going to be paid out over the next 25 years in death benefits, it wouldn’t be surprising to see that either,” he said.
While death benefits paid from super aren’t taxable where it is paid to a dependent, its possible that the government may look to increase the rate of tax where its paid to adult children for example, he explained.
“They might also look to apply a penalty tax rate where members have more than $3 million in super[for example],” he said.
“I think those are the big areas where its not going to impact their constituency.”
Labor’s proposal in 2017 to ban borrowing through SMSFs received significant backlash from the SMSF industry.
The SMSF Association stated at the time that the majority of SMSFs use LRBAs appropriately to build their retirement savings and that they should therefore remain an investment option.
Former SMSF Association chief executive Andrea Slattery also noted that there was “little convincing evidence” that the use of LRBAs by SMSFs was playing a significant role in affecting housing affordability.
Mortgage lender Thinktank also warned Labor against the ban on SMSF borrowing in 2019, with SMSF loans often a vital debt instrument for many small business owners.
Make no sense. Why not do the opposite and encourage SMSFs to borrow to invest in NDIS property.
Another reason why Labor may stop LRBAs is they are not actually “limited recourse” for the member. Most so called LRBAs require a personal guarantee by the member. That guarantee could put them at great risk if there was a loan default due to loss of income, at the same time as a property market decline. Use of LRBAs could potentially result in a member simultaneously losing all their super and their home. This is partly why the big banks have abandoned SMSF lending. The reputational risk for them is too great. Just as it should be for responsible governments, accountants, and financial advisers.
Banks requiring personal guarantees was simply ignored by the regulator. That said, if you recommend conservative levels of gearing, only proceed to give advice on funds that have adequate reserves and can implement a diversified portfolio as well as a property, than many of the issues you allude to will be minimised.
True in theory, but most SMSF property purchases using LRBAs are focused on maximising property purchase amount, which generally means high gearing, low reserves, and no diversification.
Thanks Labor and ISA Fund Trolls for your concerns.
Yes the limited recourse / guarantees are silly, as the lenders & the ATO related party i rates are higher for this supposed extra risk, when in fact there is generally no such risk due to personal guarantees.
Please advise of the problems you allude too actually occurring ?
There certainly is NOT a mass wipe out of SMSF LRBA’s ever recorded. So your concerns are theoretical and not reality on any scale of concern.
I guess on your theory ISA Funds should be banned from gearing into investments too via developments, infrastructure, etc. that often carry significant debts.
The situation is somewhat analogous to Storm Financial. The strategy they used made a lot of clients, advisers and lenders a lot of money, and everyone (including lazy regulators) was very happy with it. Right up until the time a sudden change in market conditions brought the underlying risks to the surface. The risks of a flawed financial strategy do not go away because of a long period without them being realised.
You are right that my concerns about LRBAs with personal guarantees are theoretical at this stage. Just as my concerns about Storm Financial were theoretical for most of Storm’s existence. But they are concerns founded in financial education and professional responsibility. Not, I assure you, any association with or preference for, union super.
(BTW nearly all super funds of all types invest in geared assets. Most shares have some level of gearing on their balance sheet. The problem with LRBAs is not gearing per se. It is the combination of gearing with personal guarantees by the fund member.)
Targeting LRBAs in SMSFs would be more about Labor playing class wars instead of addressing the broader issue. Targetting negative gearing does that. The whole issue with their franking credit policy – it targeted SMSFs rather than having a broader policy such as everyone can only claim 80% of franking credits they receive. Targeting LRBAs would show Labor has learned nothing, or at their core they are about class warfare rather than good policy.