The Greens have called on the Labor government to outlaw the ability of SMSFs to borrow through limited recourse borrowing arrangements (LRBA) in exchange for supporting the passage of the Division 296 tax bill through parliament.
During the second reading of the Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023 in the House of Representatives last week that will introduce the new tax on total super balances above $3 million, Greens MP Max Chandler-Mather said the growing use of LRBAs within SMSFs introduced an unacceptable level of financial risk into the superannuation system and were exclusively used for property development purposes.
“Self-managed super funds are overwhelmingly established so that investment properties can be held or transferred within a tax-sheltered superannuation framework. Self-managed super funds are using limited recourse borrowing arrangements to buy investment properties that renters can no longer afford,” Chandler-Mather stated.
“This unsustainable growth in tax-sheltered borrowing is not just turbo-charging financial risk in the super system, but it is fuelling property speculation and pushing aspiring first-home buyers out of the market.”
He added the introduction of the cap on total superannuation balances over $3 million would only serve to exacerbate existing financial risk as some funds may be too highly leveraged to pay a liability under the tax.
“The proposed taxation of unrealised capital gains in this legislation has brought the issue to the surface,” he noted.
“Taken together, the combination of accrual taxation and a 156 per cent increase in limited recourse borrowing by self-managed super funds since the Murray review presents a very real risk to the individual super funds, as well as to the financial stability of the superannuation system as a whole.
“If the government wants this timid legislation to pass, it is going to have to end super tax breaks for property investors.”
However, Institute of Financial Professionals Australia (IFPA) Natasha Panagis cast doubt on the contention LRBAs were responsible for increasing financial risk, pointing to two reports released by the Council of Financial Regulators that concluded this was not the case.
“The topic of banning LRBAs has been around for some time now and you might remember that the Council of Financial Regulators handed down a report back in 2022, and they reviewed LRBAs by super funds and they found that the current level of LRBAs doesn’t pose a systemic risk to the super system,” Panagis noted during an IFPA budget briefing last Thursday.
“That report stated that there have been some policy changes made in recent years which have reduced the risk to these arrangements and there’s no sufficient evidence to change that and suggest that there is a risk.”
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