The recent Financial Systems Inquiry report saw a number of recommendations that could significantly change the economic landscape of Australia. One of the most talked about recommendations was that of banning SMSF borrowing due to the risk to the taxpayer should the fund collapse. Whilst our blog post The Financial System Inquiry: How does it affect you? summarised the main recommendations coming out of the report, we thought the banning of SMSF borrowing warranted a dedicated post.
The recommendations coming out of the report calls for a shakeup of the Australian superannuation industry as a whole, recommending it seeks clear objectives, review and potentially replace the MySuper system with a more competitive scheme, and offer pension products to retirees.
No recommendations were made on imposing controls over the expenses of setting up and administrating SMSFs or the minimum balance requirements of SMSFs.
But a ban on limited recourse borrowing arrangements from inside super funds did make it to Murray’s list of recommendations. The report went on to suggest that the government should restore the general prohibition on direct borrowing for limited recourse borrowing arrangements (LRBA) by superannuation funds, by removing Section 67A of the Superannuation Industry (Supervision) Act 1993.
SMSFs can only use limited-recourse borrowing arrangements when purchasing property. If something goes wrong and the fund defaults, its other assets are not at risk. But lenders insist on personal guarantees outside the fund, such as the family home. Investment borrowing has been driving much of the recent boom in residential property prices and many SMEs utilise the limited recourse borrowing rules to own their business premises. With a ban on borrowing within super, there may be a negative impact on SMEs.
Decisions around these recommendations are not expected to be made until March 2015 at the earliest. We will keep you updated on this process as it unfolds, however, if you do have questions about how such changes could effect your personal situation please contact our Azure Group Wealth team at ourteam@azuregroup.com.au.
This article is intended to provide general information only, and is not to be regarded as legal or financial advice. The content is based on current facts, circumstances, and assumptions, and its accuracy may be affected by changes in laws, regulations, or market conditions. Accordingly, neither Azure Group Pty Ltd nor any member or employee of Azure Group or associated entities, undertakes responsibility arising in any way whatsoever to any persons in respect of this alert or any error or omissions herein, arising through negligence or otherwise howsoever caused. Readers are advised to consult with qualified professionals for advice specific to their situation before taking any action.