(03) 9020 2905PORTFOLIO POINT: Geared super can unpack its suitcase and settle in for an extended stay – with more protection for trustees and members.
The super gearing rules that were introduced in the dying days of the Howard Government are officially here to stay. If there was ever any doubt – and there certainly was in the minds of many industry experts – there shouldn’t be any longer.
The confirmation has unexpectedly come from Superannuation Minister Chris Bowen. Last week, Minister Bowen announced some at-the-edges changes to the super gearing rules (which are interesting in their own right and we’ll return to these).
However, the more subtle message that wasn’t announced was far more important. Namely, you wouldn’t fiddle with improving the rules if you weren’t going to keep them, would you?
Plenty of commentators and industry insiders have held a belief (for some, it was more like a prayer) that the Rudd Government would bin the super gearing rules that arrived in September 2007, just six weeks before the peak of the stockmarket and just two months before the Howard Government was ousted from office.
At the time, the change was a complete surprise. It had actually been expected that the rules would face tightened, not loosened.
But it was at a time when general attention was centred elsewhere. The Coalition shifted to the Opposition benches and, more importantly, stock markets moved into 17 months of free-fall. Neither of those mattered directly. The small, nimble businesses that were ready to take advantage of the changes fell apart (including Calliva and Lift Capital). And banks were more worried about deciding who they weren’t going to lend to, to be adding new lending categories to their lending repertoire.
Superannuation professionals were split in their support. Some embraced the idea, believing that the previous rules that allowed strictly limited gearing opportunities equated to being half pregnant. Others wanted governments to go back to no gearing anywhere.
Given the Coalition introduced it, if it was to be changed for political reasons, it was considered likely that it would come from Labor, particularly given how many inquiries they’ve launched that cover super (Ripoll, Cooper and Henry).
In any case, Bowen’s press release announced some prongs of protection that the Rudd Government would introduce to Parliament to protect the interests of those who are, or might, use the super gearing legislation.
If any of the inquiry chiefs still to report (Henry’s report is finished, but not released, and Cooper’s still has some time to run) think that they could recommend the September 2007 changes be overturned, they may as well start a redraft.
And for those who have any doubt, the announcement was not the first step in cutting back access to gearing within super. They were a first step in giving trustees a super gearing system in which they can have more confidence.
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So, what did Minister Bowen announce?
Two things. The first was to increase protection for trustees and members. The second is essentially a taxation ruling, one that clears up a potentially nasty potential side-effect for those who did use the gearing rules to profitable effect.
The government has proposed to declare the provision of gearing under super legislation to be a financial product that can only be provided by financial service licence holders.
In essence, this means that in order to get advice about super gearing products, you’re going to have to speak to someone qualified to give financial advice – financial advisers and qualified accountants.
“The ammendments will extend the Government’s consumer protection framework to cover certain superannuation borrowing arrangements such as instalment warrants and thereby help protect the savings of fund members,” Bowen said.
The ammendment is designed to hit real estate agents and property spruikers who were promoting investments through self-managed super funds. They might know something about property and given enough years in the industry and personal financial experience, they might also know enough about gearing to buy a home or an investment property in personal names. But they certainly knew nothing about the technicalities of the super gearing laws, such as limited recource loans and special purpose debt instalment trusts, etc. A little bit of knowledge …
It’s arguable that restricting the rule changes to financial advisers and qualified accountants does not go far enough. There are still plenty of both who know next to nothing about the topic. But it’s a start.
The taxation change relates to the ownership of the geared asset and how it’s transferred at the end of the loan.
When a geared asset is bought inside super, the asset needs to be held in a bare trust with a corporate trustee on behalf of the super fund. When the loan was repaid and the asset shifted from the corporate bare trust to the super fund, it was considered that there had been a change of ownership, which therefore created a capital gains tax event.
Minister Bowen has moved to assure investors that the legislation was not designed to create this as a taxation event. His proposed changes will make sure that the members are considered to be the owners of the asset for income tax purposes.
“The changes will ensure that trustees of superannuatoin funds who have entered into permitted limited recourse borrowing arrangements will not face CGT obligations at the time the last instalments are paid,’’ he said.
The changes will be backdated to the 2007-08 financial year, when the changes were made.
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And Bowen hinted at further changes. “The Government is also aware of some areas of uncertainly with borrowing arrangements made under the SIS Act and is considering the issues involved.”
One of these is likely to be the tendency of those major banks who are actually lending into this area to insist on personal guarantees from trustees. Professionals have held concern about this for some time.
Several major banks have refused to lend without these guarantees, which obviously makes the loan a long way from non-recourse. It would appear the banks are going to face some pressure to come back into the spirit of the law on this front.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.