Two industry bodies have outlined a number of ways the government can retain a ban on limited recourse borrowing arrangements (LRBA) over residential property while not restricting those structures for other forms of property acquisition by an SMSF.
In a joint submission to the Senate Economics Committee, The Auditors Institute and Institute of Financial Professionals Australia (IFPA) outlined five options the government could adopt to achieve its aim of preventing SMSFs purchasing residential property using borrowed capital.
IFPA vice-president Kurtis Alaeddin said: “As it stands, the [banning] measure reaches property outside the announced scope and can put trustees in breach through events they do not control. Any one of the five options would fix that.”
The first of those, which has been supported by a number of industry and professional bodies, is to exempt new residential dwellings from the ban by using the definition of a new residential dwelling in section 26-160 of the Income Tax Assessment Act 1997, which is the same test applied in the negative gearing and capital gains tax reforms to which the LRBA ban was appended.
“This aligns the LRBA rules with the stated purpose of the budget package rather than working against it and requires no new drafting,” the submission stated.
The two bodies also called for a tighter definition around what constitutes residential property rather than using a definition of business real property (BRP) to limit the use of an LRBA.
“As drafted, the ban applies to any real property that is not BRP. That catches more than residential property – vacant land, farmland not used in a business and mixed-use property are all swept in,” the submission said.
“If the policy target is residential property, the legislation should define residential property and ban LRBAs against that definition specifically. The current drafting is broader than the announced policy.”
If the above changes were not adopted, the submission put forward a third option to improve the operation of the ban, which would involve testing BRP status at the time of acquisition only.
“If option 2 is not adopted, the timing problem in the current ATO interpretation should still be fixed. On that interpretation, a property that ceases to be BRP during the life of the loan places the fund in breach,” the submission added.
“Testing BRP status at acquisition only would give trustees certainty for the duration of the loan without changing the underlying policy intent.”
The bodies also put forward two other options related to the operation of an LRBA: allowing only one residential property arrangement at a time and to have the Australian Prudential Regulation Authority (APRA) lift loan-to-value ratios (LVR).
“APRA could introduce financing reforms to slow the housing market and encourage new builds by modifying the LVR permitted by financial institutions. Higher LVRs could be permitted on new builds over existing dwellings,” the submission said.
Jason Spits
SENIOR JOURNALIST
Jason is a senior journalist with Benchmark Media and writes for the selfmanagedsuper website and magazine and smstrusteenews website. He has covered financial services since 1999 and has written about life insurance, superannuation, investment management and financial advice, in both a freelance and in-house capacity, and also did a brief stint as a media manager for an industry association. He has been the editor of trade titles Money Management and Financial Standard, and was most recently senior journalist with life insurance title Riskinfo.
Articles by Jason