Limited recourse borrowing arrangements
The end of the line for SMSF Borrowing?
In December 2013 the Government announced the terms of reference for the Financial System Inquiry, to be chaired by David Murray AO. The Inquiry was charged with “examining how the financial system could be positioned to best meet Australia’s evolving needs and support Australia’s economic growth”.
With terms of reference that included an examination of Australia’s superannuation system, the final report of was released late last year, and included a recommendation that the Government should restore the general prohibition on direct borrowing by superannuation funds.
What is the current position?
In 2007 the Government introduced significant changes to the Superannuation Industry (Supervision) Act 1993 (Cth) which allowed superannuation funds to enter into ‘limited recourse’ borrowing arrangements to acquire assets. Under these arrangements, the lender’s rights of recourse are limited to the asset acquired using the borrowed funds (plus in some circumstances, any security provided by a guarantor). The asset acquired using the arrangement must be a single asset (or a collection of identical assets with the same market value) which the superannuation fund is not otherwise prohibited from acquiring. Limited recourse borrowing has been a very useful strategy, particularly for self managed superannuation fund trustees looking to gear commercial property – often the business property used by the members’ own business.
What did the report say?
The report recommended that funds with existing borrowings should be permitted to maintain those borrowings, and that funds disposing of assets purchased by direct borrowing should be permitted to maintain those borrowings. While there were a number of submissions to the report that measures such as imposing a cap on fund assets that could be invested through borrowing, the final report recommended a return to the pre-2007 position whereby direct borrowing be prohibited (except for temporary borrowing for short-term liquidity management purposes).
The Inquiry’s rationale for the recommendation is the prevention of the unnecessary build up of risk in the superannuation system. The Inquiry noted that over the last five years the amount of funds borrowed using limited recourse borrowing arrangements increased from $497 million in 2009 to $8.7 billion in June 2014.
What will happen?
There is speculation that the Government will substantially amend the limited recourse borrowing arrangements at some stage in the next few months, although there has been some spirited defense of the arrangements by people such as Peter Costello, who introduced the provisions into the SIS Act as treasurer. Of course a change to these arrangements could see SMSF members choose to take on riskier loans outside of the superannuation environment. We anticipate that the coming year will be an interesting one for superannuation legislation.
What should you do?
At this stage, limited recourse borrowing arrangements are legal, and will remain so until an announcement is made. There are also alternative strategies whereby ungeared trusts can be used to acquire assets through a self managed superannuation fund. These strategies are complex, however, and members and their advisors should ensure that they seek appropriately qualified advice.
The Ballantyne Law Group is well placed to assist in relation to all aspects of superannuation – please contact us now on (07) 5606 7332 to speak to us now.
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