In the final report for the Financial Systems Inquiry handed down on Sunday 7 December 2014, chairman David Murray recommended that:
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.
The Inquiry is concerned that LRBAs pose a risk to both the superannuation and financial systems. By restating the blanket prohibition on borrowing to acquire assets, the inquiry is of the view that:
- this will limit the unnecessary build-up of risk in the superannuation and financial system
- ensure the superannuation system is used as a retirement savings vehicle rather than a broader wealth management vehicle.
In particular, the Inquiry was of the view that:
Restoring the original prohibition on direct borrowing by superannuation funds would preserve the strengths and benefits the superannuation system has delivered to individuals, the financial system and the economy, and limit the risks to taxpayers.
However, the Inquiry recommended grandfathering existing SMSF borrowings using LRBAs until the asset is disposed of.
If you have clients that are looking to borrow to acquire an asset, care should be taken particularly if the purchase contract provides for an extended contract period such as house and land contracts and off the plan contracts.
If the Government adopts the Inquiry’s recommendation, SMSFs may be placed in a difficult position where a purchase contract has been signed if:
- the legislation is changed before the acquisition of the asset using borrowings is complete; and
- the grandfathering rules do not extend to arrangements where purchase contracts have already been signed.