Self-managed superannuation fund trustees have been given a reprieve from a rule that would have curtailed their ability to borrow to buy property and, potentially, resulted in forced sales of houses, apartments and business premises.
Treasury officials have told super industry participants they will undertake further consultation on a measure that would force self-managed fund members to include the value of a loan when calculating their total super balance.
In submissions to Treasury, self-managed fund experts warned the policy could prevent some schemes from being able to repay the interest on their loans, could make banks far less prepared to offer such borrowing arrangements, and in some cases lead to forced asset sales.
While a bill proposing changes to the way loan repayments are treated under the new $1.6 million ceiling on the amount of money that can be transferred to a tax-free private pension was tabled in Parliament last week, a measure to include limited-recourse borrowing arrangements in the $1.6 million super balance has been delayed.
Consultation with industry executives is expected to start shortly in the hope that legislation can be passed by the end of the financial year. The new rule is due to commence on July 1.
Industry concern with the policy centres around the fact that under a set of super reforms slated to be introduced next month, super fund members who have $1.6 million or more in super will no longer be able to make after-tax contributions.
Self-managed fund trustees who borrow to buy property often rely on making after-tax, or non-concessional, contributions to their fund in order to repay the loan. From July 1, the annual limit on non-concessional contributions will fall to $100,000 from $180,000.
Capacity to repay
"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 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.
"This may affect the borrower's capacity to repay the loan and render the investment uneconomic. Assets covered by the borrowing may need to be sold," the SMSF Owners' Alliance said in its submission.
The SMSF Association argued that the measure was a heavy-handed solution to close a loophole that allows some self-managed super funds to circumvent the rules on making after-tax contributions. Further, it suggested that lending criteria would "prevent banks from lending to self-managed super funds unless they are able to make substantial and consistent non-concessional contributions to service a loan. The proposed amendment will prevent that from occurring for many self-managed super funds with large-to-average balances".
The association has suggested that the measure be applied only to super funds that have borrowed money from a related party, such as a member. Alternatively, self-managed funds could be prevented from receiving loans from a related party altogether.
"Following stakeholder feedback, the government will consult further with stakeholders on the proposal to add the outstanding balance of a limited recourse borrowing arrangement to a member's total superannuation balance measure," spokesperson for Finance Minister and Acting Financial Services Minister Mathias Cormann.
The Financial Review
1 June 2017