At last month’s SMSF Association (formerly SPAA) national conference, we saw the government respond for the first time to the Financial System Inquiry's recommendation to ban LRBAs.
The assistant treasurer, Josh Frydenberg, indicated that the government will consult with an ‘open mind’ on what is a highly sensitive issue with the SMSF industry.
One comment made by the assistant treasurer was around whether guarantees by SMSF trustees should be banned. Interestingly, this was a key legislative change back in July 2010 when the new section 67A and 67B replaced the previous instalment warrant rules (section 67(4a)).
The ATO had previously released a taxpayer alert, TA 2008/5, raising concerns regarding the use of guarantees, but their use was a natural part of banking practice and this warning from the regulator effectively fell on deaf ears with the lending institutions.
I think it may present a real challenge for the government to try and remove the ability of banks to not seek guarantees, given the history of this matter.
Without question, the area of LRBAs can be improved, particularly around the quality of advice – something ASIC has been working very closely on, and is currently pursuing an action around, through the Supreme Court of NSW, against a property promoter for providing unlicensed financial product advice.
In addition, best practice guidelines for SMSF lending created by the SMSF Association, which have been adopted by some lending institutions, are all positive steps for an industry that received a clean bill of health from the FSI panel.
My stance on retaining LRBAs has always been clear. I believe they have a place within the superannuation sector, but getting the policy setting right is important.
This may therefore mean change. I regularly go back to the ‘10 guiding principles for SMSFs’ from the Cooper Review. Consider the following guiding principles in the context of the future of LRBAs:
• Whilst providing freedom for an individual to control their retirement savings, a level of intervention is warranted to ensure that the legislative framework is right (principle 3). This may mean further tightening of the regulations, including guarantees, [around] who can be the lender, and more.
• Leverage should not be the core focus for SMSFs – it does have a place, but should be ancillary to the main strategies employed to build retirement savings over the longer term (principle 8).
Most importantly, the government appears prepared to listen and to engage with all stakeholders before deciding on any change with LRBAs.
No time frame has been provided by the government on this matter; however, Treasury consultation on recommendations from the FSI Panel’s final report is open until 31 March 2015.
But an open mind is a positive step to ensure that this legislation gets a ‘fair hearing’ to benefit those right for such a strategy.
I’d love to hear your thoughts on how the government should balance its policy settings through the continued operation of LRBAs.