The Turnbull government has taken planned restrictions to borrowing by self-managed superannuation funds off the agenda in the short-term in a move that may presage a weakening of the proposals.
Under a plan announced in April, debt on the books of SMSFs would be added to fund values when calculating the new $1.6 million limits for tax-free super pensions.
The move was designed to stop people effectively getting around the cap by using borrowings to reduce asset values and paying the debts off over time.
The initial consultation period for the move expired on May 3 but the government has opened discussions again with the superannuation industry.
A spokesperson for acting Financial Services and Revenue Minister Mathias Cormann said: “Following stakeholder feedback, the government will consult further with stakeholders on the proposal to add the outstanding balance of a limited recourse borrowing arrangement (LRBA) to a member’s total superannuation balance measure in conjunction with consultation on the non-arm’s length income integrity measure announced in the 2017-18 budget.”
The SMSF industry has kicked back on the moves, saying they may force some investors to sell properties because they won’t be able to make extra non-concessional contributions to their fund needed for debt repayments once it has hit the $1.6 million limit.
“Some self-managed funds may not be able to use limited recourse borrowing arrangements if they will be relying on non-concessional contributions to repay some or all of the loan interest and capital because the gross value of the asset(s) will take them over the $1.6 million total superannuation balance and they will be unable to make further non-concessional contributions to service the debt,” the SMSF owners alliance said in a submission on the issue to Treasury.
The opposition has not expressed a view on the legislation, saying instead it would like to ban SMSF’s borrowing altogether.
“Labor has previously stated that we will restore the general ban on direct borrowing by superannuation funds, as recommended by the 2014 Financial Systems Inquiry, to help cool an overheated housing market partly driven by wealthy Self-Managed Super Funds,” a spokesman for Labor’s shadow Financial Services Minister Katy Gallagher said in response to questions from The New Daily.
“This has seen an explosion in borrowing from $2.5 billion in 2012 to more than $24 billion today.”
Stephen Anthony, chief economist for Industry Super Australia, said there was an argument for leaving out existing arrangements from the changes.
“I’d be happy to see transition arrangements put in place and allowing the restrictions to apply to arrangements from here on in,” he said.
“But if the outcome of the consultation is just to water down what I see as a useful structural reform, I’d be very disappointed.”
The industry fears that introducing the new restrictions to existing arrangements would mean some SMSF owners would be forced to sell properties held in their funds because they would not be able to make loan repayments.
The explosion of SMSF property debt has been a concern for regulators, with the Murray inquiry into the financial system in 2014 recommending SMSF borrowing be banned, warning “further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system”.
The Reserve Bank concurred.