Practical action in relation to the potential ban on limited recourse borrowing arrangements (LRBA) and grandfathering was now crucial as that legislative change was likely to be the major disruptor of 2015, according to an expert SMSF lawyer.
At the 2015 SMSF Association National Conference in Melbourne recently, DBA Lawyers director Bryce Figot said following the Financial System Inquiry’s (FSI) recommendation to remove the exception to the general prohibition on direct borrowing for LRBAs by super funds, any amendments in the space required advisers to take steps to mitigate any harshness that might otherwise be caused to clients.
“That being said, a very important action point for right now is that the FSI has recommended grandfathering, more specifically ‘funds with existing borrowings should be permitted to maintain those borrowings’,” Figot said.
“But this is going to pose a practical problem though, so we have to contact our clients who have or who are going to very shortly have super funds that buy off the plan.”
He said if LRBAs were banned sometime between now and whenever settlement might occur, that is, whenever the bank might be willing to sign the contract and pay the money, it would become more than just a disruption for the industry.
“The question that would be on the tip of everyone’s tongues is: does this super fund qualify for the grandfathering that was recommended in the inquiry?” he said.
“We can’t say yes with 100 per cent confidence, however, what we can do is to [consider] the last time the borrowing laws were changed – in 2010, when we got the current set of LRBA laws from the previous instalment warrants, we had grandfathering there.
“Let’s assume that the grandfathering for any possible changes coming up will be the same as last time; according to the legislation the line in the sand last time was ‘when the arrangement was entered into’.
“And the ATO stated on July 2010 in the NTLG (National Tax Liaison Group) minutes, the arrangement for borrowing is entered into at a particular time if ‘valuable property such as contractual rights has come into existence in respect to the arrangement. This may occur at a time before there has been any transfer of money.’”
In simple terms, it was when the loan contract was signed with the lender, he said.
“[That] can happen before you actually draw down any money,” he said.
In order to protect clients from the potential legislative disruptor, SMSF advisers needed to advise clients of the potential ban now, he said.
“[We need to warn them] so their eyes are open to consider a related-party loan as soon as possible, so if LRBAs are banned, the related party has its foot in the door, it can still draw down and get that money to settle the borrowing,” he said.
“Am I using a lot of conjecture in saying this? Of course, however, when there’s legislative change on the horizon, this is the sort of thing we have to bear in mind.”
He also flagged the penalty regime and stamp duty, particularly in relation to Victorian property, as two other legislative shocks that would disrupt and cause issues for the industry this year.
