Speculation around borrowing inside super funds has received a lot of media coverage in recent months, especially since David Murray handed down his Financial System Inquiry in which he recommended a total ban. Last week, Assistant Treasurer Josh Frydenberg said the government will crack down on borrowing by self-managed super funds (SMSFs) but will not follow the Murray’s recommendation to ban it outright.
So what could the government’s response look like?
The government may take several steps to reduce the perceived risk with SMSFs borrowing. The first step may be similar to the ‘loan value ratio’ banks use to see how much of a deposit you need; the government may cap any borrowing to say 50% of the SMSF’s total assets. This move would be designed to reduce the risk of the SMSF members losing the majority of their retirement benefits should the SMSF borrowing arrangement fail in any way. Think of it as a form of forced investment diversification, if you will.
Secondly, at present SMSF borrowing arrangements are not considered ‘financial products’, therefore technically people advising or recommending on such arrangements do not need a financial services license. The government may seek to change this so that only licensed advisers can recommend SMSF borrowing arrangements to stop unscrupulous property spruikers from overheating the property market.
The SMSF borrowing arrangements are structured to be ‘limited recourse’, meaning the other assets of the SMSF are protected should there be a default on the loan. However, banks have been securing personal guarantees outside of SMSFs which in a way circumvents the limited recourse nature of the loans. The government may look to legislate that personal guarantees are not allowed going forward, and it will be interesting to see how the banks respond with their lending practices and products.
What does this mean for you?
Well if your SMSF already has a borrowing arrangement in place you should feel reasonably confident that any existing arrangements will be ‘grandfathered’ into the legislation. Traditionally, any significant changes to superannuation have allowed existing legislation to continue for those affected, since superannuation is considered a long term financial investment. However, you might find that if you seek to refinance or make other changes to the SMSF borrowing arrangement structure in the future that you may need to abide by the new laws.
Those who are in the process of putting in place a SMSF borrowing arrangement should consider speaking to their advisers today to ensure that everything is in place so that any government announcements do not adversely affect your strategy. The government has been lobbied hard that some SMSF borrowing arrangements have long lead times between contract signing and settlement so we don’t expect an overnight change to the law – but you never know!
Finally, for the rest who have thought about SMSF borrowing but not acted – now is the time to speak to your adviser about what SMSF borrowing entails, the trips and traps and if it is the right strategy for you. One thing is for sure, the window of opportunity is going to narrow so this could be your last chance to super-charge your retirement.
If you would like to know more about SMSFs please contact Jason McLaren on 0418 800 363 or visit our website at www.axiomsuper.com.au. You can keep up to-date on all things SMSF by following us on Facebook.
The information contained in this article is general in nature and does not take into account your personal situation or objectives. You should not act on this information in any way before seeking professional advice from a licensed financial adviser.
