The future is very bleak for limited recourse borrowing arrangements (LRBA) and borrowing within SMSFs, with a number of factors providing the final nails in the coffin, according to a lawyer.
DMAW Lawyers business transactions and advice practice principal Suzanne Mackenzie said the combination of the financial advice revelations at the banking royal commission, including those relating to SMSF borrowings and unscrupulous advisers advising on property investments within SMSFs, and new contribution cap rules under the 2016 superannuation reforms point to the demise of LRBAs.
Mackenzie also noted the 2014 Financial System Inquiry recommended the removal of LRBAs, and while the government refused to ban SMSFs from borrowing, it said it would monitor the situation and ask regulators to report back in three years.
“So three years is up in October and they should at that point report back to government with a recommendation regarding whether or not borrowings should be continued to be available for superannuation funds and in particular LRBA-style borrowings,” she told delegates at the Tax Institute 2018 National Superannuation Conference in Melbourne last week.
“Now, when you look at the financial advice hearings that occurred earlier in the year in the royal commission, there was quite a lot in those hearings about SMSFs and SMSF borrowings, which I think doesn’t augur well for the kinds of reports that are likely to come through from APRA (Australian Prudential Regulation Authority) and ASIC (Australian Securities and Investments Commission) and the RBA (Reserve Bank of Australia) in terms of making any recommendations about borrowings.
“Because there certainly are a number of unscrupulous advisers out there, one-stop shops, and people being packaged up into property investments in SMSFs and it shouldn’t be happening.”
In terms of the 2016 super reforms, with contribution caps being reigned in and reducing in 2017, it has made the viability of borrowing more difficult in terms of being able to meet repayment obligations through non-concessional contributions, she noted.
“Anyone that has $1.6 million in their fund all of a sudden can’t make non-concessional contributions to meet borrowing payments, loan repayments. That was a clever nail in the coffin,” she said.
She also noted the recent super tax integrity measures where the value of the loan for LRBAs post-1 July will be added to the total super balance.
“So it’s more likely that members with LRBAs are going to get higher and closer to that $1.6 million cap if it’s a related-party loan or it’s someone that has satisfied a condition of release with a nil cashing restriction, you’ve got those integrity measures kicking in and making borrowing even more difficult,” she said.