SMSFs: a low appetite for borrowing
A recent Russell Investments self-managed superannuation fund (SMSF) survey has revealed there is a low appetite for borrowing within super.
The survey revealed that three-quarters of trustees (75.6 per cent) have not used the new borrowing rules and do not intend to do so. The survey report noted that it was possible there was a low appetite for borrowing via an SMSF due to strict enforcement of the new borrowing rules.
There is also some confusion as to what actually constitutes an improvement to a property held within super that is geared, says Macquarie Adviser Services technical manager, David Shirlow. Shirlow says that in the explanatory memorandum that accompanied the legislation there was a strong indication that the intention of the legislation was to prevent trustees from spending fund money to improve a property.
“On the one hand you have policy that seems to allow borrowing to acquire real estate in super funds, but on the other hand you have this restriction that, for practical purposes, is making things difficult,” Shirlow explains. “We need clarity about whether improvements can be made, or we need a change of legislation.”
Shirlow assumes that the intention is to stop trustees from increasing the value of the property, which is subject to a loan. He explains that the other party involved is obviously the lender.
National technical director of the Self-Managed Super Funds Professionals’ Association of Australia (SPAA), Peter Burgess, agreed it is difficult to follow the rationale behind some of these borrowing within super rules when it came to property.
“I think what they were trying to get at is that the lender then has more equity to call on in the case of a default,” he says. “But it’s very difficult to follow that argument, and certainly the industry has been very outspoken on this point. It just does not make sense that you cannot improve an asset once it’s in one of these [borrowing] arrangements. It’s counter to what people should be trying to do with these assets.”
Burgess notes that the Australian Taxation Office’s (ATO’s) viewpoint is that it doesn’t matter what the source of the money is when it came to making improvements – it was simply not allowed.
“The end result is that you’ve improved the asset, you therefore have a new asset, and that’s not allowed under these provisions,” he adds.
Burgess suggests that trustees and their advisers think carefully before entering into a borrowing arrangement, especially when it came to a property that may need repairs at some point over the life of the loan.
Cavendish Superannuation SMSF specialist executive, David Busoli, says the ATO’s guidelines around the borrowing rules are proof enough that the restrictions are “ridiculous”. For example, if a house were burnt down, the rebuilding of that house was considered an improvement and therefore was not allowed under the rules, he explains.
Burgess agrees that the rules are so strict as to be ridiculous, although in the case of properties affected by a natural disaster the ATO recently stated it would be flexible.
Busoli says that compared to the excess contributions issue, the ATO was more willing to be flexible when it came to breaches of the borrowing rules, adding that in fact its limited ability to show discretion in the case of excess contributions was “out of character”.
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