FSI recommends end to SMSF borrowing

The Financial System Inquiry (FSI) has recommended that limited recourse borrowing arrangements (LRBAs) in superannuation funds be banned.

The panel has recommended the removal of the exception to the general prohibition on direct borrowing for limited recourse borrowing arrangements by superannuation funds.

"Government should restore the general prohibition on direct borrowing by superannuation funds by removing Section 67A of the SIS Act on a prospective basis," the report stated.

However, the report did state the exception of temporary borrowing by superannuation funds for short-term liquidity management purposes should remain.
While the FSI acknowledged the level of borrowing is currently relatively small, the report suggested if direct borrowing by funds continues at current growth rates, it could pose a risk to the financial system.

The report stated this recommendation seeks to prevent the unnecessary build-up of risk in the superannuation system and the financial system more broadly.
While FSI recommendations do not constitute law, Bryce Figot, financial services lawyer and director at DBA Lawyers said he expects most recommendation to be implemented.

With regards to timing, Mr Figot said the next federal Budget is a logical time for the government to adopt the LRBA recommendation.

“Accordingly, it is possible that trustees of superannuation funds will be able to enter into LRBAs until at least May 2015,” he said.

“Naturally, it is unlikely that an announcement by the government would be immediately accompanied by the act that implements it. Rather, it is more likely that the effect of the act will be backdated to the day of the government announcement”

In terms of grandfathering, the report stated, “In implementing this recommendation, funds with existing borrowings should be permitted to maintain those borrowings. Funds disposing of assets purchased via direct borrowing would be required to extinguish the associated debt at the same time.”

Given this, Mr Figot recommends those wanting to engage in LRBAs do so as soon as possible in order to maximise their chance of qualifying for grandfathering.

“Where an SMSF trustee signs a purchase contract with a view to later settle the purchase using borrowings, they should consider signing a related party loan agreement now … even if they currently intend to ultimately borrow from a bank,” Mr Figot said.

 

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