While Labor’s proposal to remove cash refunds for excess dividend imputation credits has been a divisive election issue since it was announced in March last year, SMSF borrowing is another issue fuelling debate between Treasurer Josh Frydenberg and Shadow Treasurer Chris Bowen more recently.
In April 2017, Labor announced that as part of its plan for housing affordability, it would “restore the general ban on direct borrowing by superannuation funds, as recommended by the 2014 Financial Systems Inquiry”.
Bill Shorten stated in a media release at the time that this would “help cool an overheated housing market, partly driven by wealthy SMSFs”.
After Josh Frydenberg issued a media release criticising Labor’s franking credit policy on the basis that it would distort market behaviour, Chris Bowen accused Mr Frydenberg of ignoring regulator concerns about SMSF borrowing in a Twitter post.
In response, Mr Frydenberg posted comments highlighting that borrowings by SMSFs account for only 2.9 per cent of the total Australian and overseas assets held in SMSFs, noting that it was “only a small proportion of their overall assets”.
“It is something which has to be monitored which is exactly what the government has done,” Mr Frydenberg said in the post.
“In response to the Financial System Inquiry and our concerns about the availability of data in this area, we tasked the Council of Financial Regulators to review non-recourse lending to SMSFs and to use enhanced ATO data in this area to report back to the government within three years in order to inform consideration of whether changes to the borrowing regulations might be appropriate in the future.”
Mr Frydenberg said that the government is expecting this report next month.
In a quarterly statement released last month, the Council of Financial Regulators stated that while the use of limited recourse borrowing arrangement has risen over time, it remains relatively small.
“Leverage by superannuation funds can increase vulnerabilities in the financial system, though near-term risks have reduced with the shift in dynamics in the housing market,” the statement said.
It’s pure politics, Labor HATE SMSFs and especially LRBAs as they loose too many Union Fund decent size accounts to SMSF and LRBA properties.
Like all politicians they will dress up the reason to make it seem like a real issue whilst the true reason is the continued fight at every possible angle to beef up their Industry Super Funds and try to kill SMSFs
SMSF’s acquiring business related property has been a sound strategy and benefit for over 30 years.Before borrowing was allowed,often the property was transferred in stages.This strategy will continue if there is a blanket ban on SMSF’s borrowing. Surely Labor’s policy is in relation to residential property.And yes there are SMSF’s with over exposure to residential property.Surely Labor’s proposed ban on borrowing is a dead duck re housing affordability as few banks are now lending to SMSF’s for residential property. Liam makes a sound point that most business related property where there is a loan the LVR is very low risk. Time the pollies left Super and especially SMSF’s alone.
Many small to medium business owners with SMSFs have used ownership of commercial/industrial or retail property as part of their long term retirement, business and wealth management. To be a small business owner carries many risks and many try to control some of the risk by being their own landlord and having the property in an SMSF where it is tax effective, saving for retirement and protected from bankruptcy. As property prices have risen the use of leverage has become an essential part of that strategy. I don’t want to see a perfectly valid strategy ruined by political manoeuvring. The majority of cases I have seen have an LVR of 605 or less and nearly all trustees are making huge inroads in to paying down the loans faster than scheduled because they have been engaged in the process and finally see superannuation as the great vehicle for retirement savings that it is.
Many investment advisers who do not or cannot advise on property denounce it as a valid retirement strategy even though the majority of Australians see it as the one strategy they are comfortable with. It is valid, including with a managed level of leverage as part of a diversified portfolio invested for the long term. I am in favour of managing the risk, demanding diversification, putting a limit on the leverage at say 60% and ensuring advice is received from a party that receives no commission/fees/marketing budget as part of the property purchase.
Mu job as an advisor to SMSF clients is to guide them i the rules and make them aware of the risk, costs, pros and cons of each strategy they are considering including exit strategies and not to simply pigeon hole them in to investments on an approved list.
Oh Liam we all wish that Politicians had some real brain and care for the Super sector, rather than the ever increasing point scoring and care for their own interests and jobs.
Your comments are completely correct but will unfortunately mean nothing.
I’m 33 and I have a limited recourse loan in my superfund. We got a property before it was re-zoned, didn’t even have flooring on a massive block. The rent more than covers the repayments – and the plan is to subdivide and build green titles and sell in retirement (if there are still CGT exemptions). If borrowing is removed, what a massive impact that will have to our fund and what then would be the point of us having an SMSF?
It will be highly unlikely that they will force you to wind up any existing LRBA’s that you already have in place, perhaps simply ban any new LRBA’s from a certain date.
Just a reminder that you cannot change the nature of a SMSF asset that has a LRBA on it (so you wont be able to subdivide until after the borrowing is cleared)
It won’t be removed retrospectively so what is in place will be fine. (We hope?)
But Labor will certainly want to kill new LRBAs
I am totally against borrowing through a super fund as the tax benefits are minimal and can lead to unintended consequences without the ability of any recourse especially since the rule applying to super are changing with avery new goverment.If super is continues to be used as a political football it will ultimatel;y fail its intended consequences and that is to provide a reasonable and sustainable standard of living comensurate with that to which one was accustomed to prior to the member’s retirement.It was never intended to reduce the member’s standard of living once the member retired
I think you are looking at tax advantage in just one way, you would not agree with lending through super. You are missing the whole point. You don’t borrow through super for the tax deduction on the interest. Maybe better to get to know smsf before having an opinion.
Dom is spot on, the tax benefits of borrowing through super shouldn’t be a reason why you take out a borrowing in a SMSF. A few typical reasons off the top of my head can include, not having sufficient funds to purchase the property outright, you don’t want to tie up all of your SMSF cash in the one asset, plus a bunch of reasons for related party loans (subject to safe harbour provisions)
Lets see how this works in an environment of rising global interest rates and its impact on the residential property market. An strategy geared heaviliy into property is stupid regardless of method. Individual or SMSF. Its amazing that these “regulators” have not learnt a damn thing from Storm Financial and the effect of gearing. Pack of incompetent fools. Where is Best Interest for Politicians I say ?
Given LRBAs all have significantly lower LVRs than most standard investment properties. Plus generally have SGC conts plus rent to cover the loans.
I really can’t understand how people say they are so risky ????