SMSF investors face property crackdown

A major super shake-up could stop SMSFs from buying residential properties with borrowed money, sparking a fierce debate over housing affordability and retirement savings.

The Australian government is backing a Greens' policy to put a stop on self-managed superannuation funds (SMSFs) from purchasing residential properties with any capital assistance, arguing the sector is currently gating nearly two million properties from first homebuyers.

What is changing for SMSF property investors?

The Greens are backing amendments that would ban self-managed super funds from using limited recourse borrowing arrangements (LRBAs) to purchase residential property.

An LRBA protects the SMSF as a whole by safeguarding other assets held by the SMSF from the lender if the loan defaults.

Aiming to pass the bill in the coming fortnight, it described the act as an exploitation of a "loophole" where investors use SMSFs to buy up tax-advantaged properties and proposed to remove ministerial discretion that would allow a minister to wind back these reforms.

However, the Greens argue grandfathering existing arrangements will allow investors to continue benefiting from tax concessions and leave around 1.7 million properties in investor hands rather than making them available to prospective first-home buyers.

Greens say reform will help first-home buyers

Greens leader Larissa Waters criticised Labor's "low ambition" to fixing the housing crisis.

"... by grandfathering in wealthy property investor tax perks Labor has once again chosen to put the 1% over the millions of people trying to buy their first home," Waters says.

"Backing this bill puts an end date on these tax breaks - but Labor's low ambition means that inequality and the housing crisis will be worse for longer. This enduring housing crisis will now be squarely of Labor's design.

"We are glad that the government has listened to some of the concerns raised through the inquiry process by the Greens and experts, but Labor has again ignored young people and renters."

Meanwhile, Greens senator Nick McKim added while the government is making small steps in the right direction, it has missed a "generational opportunity" to fix the burgeoning housing pressure.

"After four years in government and multiple failures to act, Australia's housing crisis is now Labor's housing crisis," McKim says.

"Labor has chosen to skew this package to benefit wealthy property investors in every way they can. They have delayed relief for renters, pulled up the ladder on first homebuyers, and let the 1% keep $33bn in tax breaks."

In response, SMSF Association chief executive Peter Burgess was disappointed in the decision, claiming that LRBAs pose "no material risk" to the super system under appropriate circumstances.

"Banning LRBAs for residential property represents a clear departure from nearly two decades of settled policy. If property spruikers and high-pressure sales tactics are the issue, the answer is to target that conduct directly and not trade away LRBAs investing in residential property just to secure passage of their Federal Budget tax measures," Burgess says.

"LRBAs are a legitimate investment tool that, when used appropriately and under existing regulatory safeguards, allow individuals to invest in assets through their self-managed superannuation fund that they may not otherwise be able to do.

"The problem is not the borrowing structure itself, but the conduct of those who aggressively market unsuitable property investments and make unrealistic claims about returns and retirement outcomes."

Burgess also highlighted a consultation on the reforms should be launched, and a grandfathering provision should be on offer as many investors and SMSFs have planned their investments based on the existing rules.

"Many investors and SMSF trustees have made legitimate financial commitments based on the existing rules. Any changes to LRBA rules should include appropriate consultation and grandfathering provisions or a substantially longer implementation period to ensure investors are not left high and dry midway through a significant financial commitment," Burgess added.

Will existing SMSF property investments be affected?

Meanwhile, SMSF Alliance managing director David Busoli echoed Burgess' concerns, stating the change represents another "broken promise" from the government.

"The Greens have been implacably opposed to SMSFs generally and limited recourse borrowing in particular, even though the use of LRBAs has been, in the main, appropriate and a legitimate vehicle for superannuation members, including younger members, to save for their retirement," Busoli says.

"Also, demonstrably, the effect on the availability of homes for new home buyers has been negligible.

"The change will not be retrospective and will not affect existing contracts or, presumably, those entered into before the measure becomes law though details are yet to clarified."

This article first appeared on Financial Standard

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