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Factors could force LRBAs down to lower level

Limited recourse borrowing arrangements (LRBA) via SMSFs will be affected by the new safe harbour guidelines as well as bank lending rules and the latest interest rate cut, which could result in a lower natural level set for borrowing going forward.

The SuperConcepts “SMSF Investment Patterns Survey” revealed that during the March quarter 2016 around 19.4 per cent of the funds in the survey were currently using a borrowing arrangement compared to 17.5 per cent during the previous quarter.

At the end of the March quarter, 35.6 per cent of all direct property holders had a gearing arrangement in place, up from 33 per cent in the previous quarter.

In April, the ATO issued Practical Compliance Guideline 2016/5 “Income tax – Arm’s length terms for Limited Recourse Borrowing Arrangements established by self-managed superannuation funds”, outlining the specific conditions they must meet to avoid falling foul of the non-arm’s-length income rules.

“Will the changes in lending policies have an impact on this?” SuperConcepts technical and strategic solutions executive manager Phil La Greca told selfmanagedsuper.

“Certainly we expect the related-party [safe harbours] to cause some to shut down.

“The change in bank lending rules and criteria I think will also slow down the process simply because it’s not going to be as easy as it used to be, so we expect there to be an impact, it’s just a question of the scale of the impact.”

In addition, La Greca highlighted that there was a focus only on the headline issues regarding interest rate cuts.

“Now that was presumably owner-occupied [loans], but do they also cut through investor loans?” he said.

“It’s an interesting question and potentially another factor especially as there’s suggestion of another cut somewhere in the wind before the end of the year.”

As a result of those factors, a new natural level of borrowing at a lower level might be set, he suggested.

“Have we hit a peak, so to speak?” he said.

“Will LRBAs just bobble around at a level going forward now that you could say all the rules have been settled?

“You’d expect that there is a level [for borrowing] and then maybe the issue will be that maybe we won’t be talking about competition at a new product level, but more around refinancing, so you might find people change lenders.

“The next quarter or two for the LRBA numbers will be really interesting because these factors will change the marketplace, no question, as they work their way through the system.”

DBA Lawyers director Dan Butler said more trustees might regard LRBAs as an attractive opportunity in light of the proposed super contributions changes delivered in the federal budget.

“When using a related-party LRBA in conjunction with div 7A (division 7A), it could become a very popular strategy, but would require ongoing monitoring,” Butler said during a DBA SMSF seminar in Sydney last week.

“So it may be that there’s more emphasis on LRBAs, given the limited contributions caps.”

The SuperConcepts survey covered about 2900 funds, a sample of SMSFs administered by Multiport and the investments held at 31 March 2016.

The assets of the funds surveyed represent around $3.1 billion.

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