The government's response to the Financial System Inquiry (‘FSI’) was released today. It is good news for SMSF Borrowing!The full text of the government’s response is available at the Treasury website.
Why the Concern?
The final FSI report — released in December 2014 — recommended that the government remove the exception to the general prohibition on direct borrowing for SMSF's. More specifically, it stated that the Government should restore the general prohibition on direct borrowing by superannuation funds by removing Section 67A of the Superannuation Industry (Supervision) Act 1993 (SIS Act) on a prospective basis.It described the problem as follows: "growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system". The inquiry notes an emerging trend of SMSF borrowing arrangements. Over the past five years, the amount of funds borrowed increased almost 18 times, from $497 million in June 2009 to $8.7 billion in June 2014.
Although the limited recourse nature of SMSF Borrowings is supposed to limit risk, the FSI report was sceptical, stating: "Because of the higher risks associated with limited recourse lending, lenders can charge higher interest rates and frequently require personal guarantees from trustees. In a scenario where there has been a significant reduction in the valuation of an asset that was purchased using a loan, trustees are likely to sell other assets of the fund to repay a lender, particularly if a personal guarantee is involved".
The Government rebuffs the FSI Concerns
So it seemed that SMSF Borrowing would be banned. The government’s response was received earlier today, stating:"The Government does not agree with the Inquiry’s recommendation to prohibit SMSF Borrowings. While the Government notes that there are anecdotal concerns about lending to SMSF's, at this time the Government does not consider the data sufficient to justify significant policy intervention.The Government will however commission the Council of Financial Regulators and the Australian Taxation Office (ATO) to monitor leverage and risk in the superannuation system and report back to the Government after three years.This timing allows recent improvements in ATO data collection to wash through the system. The agencies’ analysis will be used to inform any consideration of whether changes to the borrowing regulations might be appropriate.
Moving forward with Confidence
Naturally, this is good news. It is particularly good news for SMSFs that have entered into off-the-plan purchases where they are unable to draw down on the loans for lengthy periods as the announcement provides greater certainty.
We are adept at structuring for SMSF Borrowing and have been structuring our clients affairs since the law changed to allow this in September 2007. Further, Linda Hamilton our Lending Partner knows which banks continue to fund for SMSF's and what their strengths and weaknesses are so don't hesitate to give her, or myself a call.