Some of you may have heard in the news about the Government having an inquiry into our financial system – aptly called the Financial System Inquiry or FSI for short. The purpose of this inquiry, led by David Murray, was to establish a direction for the future of our financial system by laying out a blueprint over the next decade. The inquiry then produced a big fat report with a list of recommendations for the Government to implement. After 12 months from the report release date, the Government has formally responded with the recommendations it has endorsed.
Report Suggests Ban SMSF Borrowing
One of the most contentious recommendations from the report was to ban limited recourse borrowing within Self Managed Super Funds (SMSFs).
For those who are unaware, SMSFs have been able to borrow to purchase assets, such as residential and business real property. The term ‘limited recourse’ simply means that the loan is secured against the asset being purchased and is contained within the super fund (in a special trust). If the loan defaults, the lender’s rights are limited to the asset held in the separate trust. This means there is no recourse to the other assets held in the super fund.
FSI Concerned by SMSF Uptake Impact
The FSI report was concerned that the growth in super funds borrowing could increase risk to the financial system. More specifically, they noted the amount of borrowing within super funds has increased by over 18 times during the past 5 years. While there are valid arguments for why borrowing in super should be banned (for example, it has contributed partly towards house price unaffordability), we believe this blanket recommendation to ban borrowing in super would be bad news for farmers and small business owners who wish to expand their businesses by purchasing more land or property. We have found this to be a very popular strategy for new and existing clients on the Eyre Peninsula, particularly during above average seasons where tax has been a problem. In short, the SMSF arranges a loan to purchase the land and leases it to the farm. Tax deductible contributions and lease payments are then made into the SMSF, which are used to repay the loan.
Govt Rejects SMSF Borrowing Recommendation
Fortunately, for our farming and small business clients, the Government rejected this recommendation and has allowed limited recourse borrowing in super to continue. As a note of caution, they are planning on reviewing this decision in three years’ time. If the rules did happen to change at that point, we would hope that existing arrangements become grandfathered.
When the inquiry talks about risks to the financial system, we believe that using one’s super to grow their business is quite different and much lower risk when compared to the many eager property spruikers who are keen sell investment properties to naïve mums and dads. It is certainly not a ‘get rich quick’ scheme that suits everyone.