Given the SMSF investor population has traditionally been at the wealthy end of the scale, it’s a tough political ask for the government of the day to grant concessions to the SMSF sector
As such, SMSFs have long been a political football, despite investors’ overwhelming compliance with tax laws.
Nowhere is this more obvious than with SMSF loans, known as limited recourse borrowing arrangements (LRBAs). The federal government allowed SMSFs to borrow in 2007, but have been gradually chipping away at the policy, ultimately restricting their use and appeal.
The government’s distaste for LRBAs has had a knock on impact in the financial services sector, particularly with lenders.
With all that in mind, several market and policy changes from 2017 and 2018 will impact LRBAs in 2019, including:
All major banks have stopped writing new SMSF loans, which significantly diminishes an already tough market for SMSF investors. The terms of an LRBA are typically much tougher than a regular mortgage, requiring up to a 40 per cent deposit in some cases.
Second-tier banks, including the likes of AMP, also cut the interest-only terms on their SMSF loan products in 2018.
More legislative change
At the moment, a bill is before the Senate that looks to add the outstanding loan amount for certain LRBAs to a member’s total superannuation balance.
With new restrictions on the amount of money you can hold in super before additional taxes apply, this seriously limits the appeal and feasibility of LRBAs.
You can read more about how the balance caps apply to your superannuation here.
‘Death by 1,000 cuts’
SMSF experts fear the ongoing changes will dry up the lending market, and ultimately turn off SMSF investors from using leveraging strategies in their fund.
Meg Heffron, director at Heffron SMSF Solutions, has found low-risk SMSF investors looking to use LRBAs are now ditching the strategy because of the unstable political environment.
Ms Heffron, who was on the board of the government’s 2010 Superannuation System Review, fears it is “death by 1,000 cuts” for SMSF borrowing.
“There’s plenty of reasons to attack on policy grounds – such as that [borrowing in super] potentially fuels heated housing markets. If that was being advanced as a reason, I might get it. But evidence of people blowing up their superannuation with LRBAs? I don’t believe that exists,” she said earlier this year.