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Cooper Review

Government target limited recourse borrowing arrangement in SMSFs

John Hewison
Founder and Director
27 Sep 2013

I note with interest all the attention being focussed on Self-Managed Superannuation Funds (SMSF) of late in response to a reported $60 billion surge into property investment by SMSFs since the “limited recourse borrowing arrangement” (LRBA) rule changes introduced in 2007.

 New Liberal Senator and Assistant Treasurer Arthur Sinodinos said in an interview with the Australian Financial Review that he wanted to make sure that SMSFs did not have an advantage over industry and retail super funds. 

The reality is that the Cooper Review into superannuation concluded that the SMSF sector was generally well managed and compliant. The growth in popularity since 2007 is due to the poor performance of many institutional funds and a growth in the desire of superannuants to gain control of their financial destiny. 

Last time I looked, the legislation relating to superannuation fund LRBA applied to all funds not just SMSFs. One of the main triggers for the introduction of LRBA was the replication of internally leveraged investment warrant investments.  These are a packaged financial product that consists of internal loans to leverage exposure to listed shares which were largely the domain of bigger superannuation funds. Whenever something like LRBA is introduced and can be subject to abuse, it usually happens. 

Back in the 90s it was possible to “sell” or transfer personal residential property into super. We then saw some “creative” lawyers promoting a scheme where major tax deductible contributions could be made to super and then the super fund “purchased” the family home to “wash” through the contribution and return the cash to the member. This was quickly blocked by the ban on transferring personal residential real estate to super. 

Certainly there is evidence of some widespread promotion of leveraging real estate in super and there is no doubt that an element of abuse will surface. Sadly, there is some likelihood that the ATO will move to have this legislation reversed, thus blocking an otherwise legitimate investment option for superannuation funds and the opportunity to build retirement wealth. 

I suggest the Government avoid singling out SMSFs in their review and over-reacting to the minority that abuse the rules. There has been massive confusion and interpretation surrounding the LRBA in super due to the lack of detail contained in the legislation. The Government needs to tighten up the rules and make them clearly understandable to all concerned – including the ATO. 

According to another article in the AFR, Tom Garcia the CEO of the Australian Institute of Trustees has said that SMSFs enjoy a major tax advantage because members were not required to pay capital gains tax on investment when they started a pension. He intimates that members of large funds do not enjoy that advantage.   

The reality is that large funds are structured so that a member has to change from an accumulation account to a pension account thus triggering the CGT issue. A SMSF can simply commence an income stream and convert the accumulation account without disposing of assets to another account. This is not a legislative issue, it is the way large funds choose to structure and operate for their own administrative purposes.

SMSFs do have advantages over large funds but they are not a subject of legislation. All funds operate under the same legislation and obey the same rules. The institutional lobby group wants the government to change the rules to suit their structurally flawed model which results from the commoditisation of superannuation into a marketable product. 

Ultimately, it is the government’s responsibility to ensure policy decisions are not made in a knee-jerk reaction to industry debate; but are considered carefully to minimise risk and maximise opportunities for Australians to build comfortable retirement savings.

Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email info@hewison.com.au or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.