Gearing in DIY funds under threat

SUMMARY: SMSF borrowing arrangements and super tax for higher earners at biggest threat for change for Murray’s FSI final report.

High-income earners and super property buyers could be about to cop a super bullet in the neck, if conjecture is to be believed.

The industry chatter suggests that another series of “big bang” changes for superannuation could be on the way. The belief is that the delivery vehicle will be David Murray’s Financial Systems Inquiry, which is due for its final report by the end of the month.

The constant chatter in the last two years or more has been about fairness in super. Particularly, that higher-income earners get a disproportionate benefit for their super contributions, swapping a marginal tax rate of up to 49% for the 15% super contributions tax rate. This, while people on lower tax rates, are actually penalised (depending on the inclusion fo the low-income super contribuition of up to $500 or not being maintained by the Abbott Government).

That tax break is being referred to as “unfair” by increasing numbers of people, both inside and outside the industry itself.

But the greatest threat – which is sparking great debate in industry media – is property gearing in SMSFs.

If the government makes announcements at the same time that the final version of Murray’s FSI is released, it would appear anyone who is currently considering a geared property investment in their SMSF, but not bedded down in one, could face potential problems.

Even some of those who have signed contracts could be in trouble, depending on which stage of the purchase the buyer is in.

It is considered unlikely that any changes would be retrospective. Making SMSFs who have paid hundreds of thousands of dollars for any investment, including often tens of thousands of dollars in stamp duty, sell their investment (usually incurring sales costs of 3% or so) would be disastrous for a lot of SMSFs.

Particularly those who have bought and are currently underwater, but who would otherwise be willing to ride out any underperformance.

If a ban were implemented, existing arrangements are likely to be grandfathered. And future arrangements could be banned. But what about those in progress?

The issue would likely then become what constitutes an “existing arrangement”.

DBA Lawyers’ Bryce Figot has pointed out that a government could take a number of different viewpoints. This could include when the purchase contract is signed, when a deposit is paid, when a bare trust deed (to hold the property in a SMSF) is signed, when a loan contract with a lender is signed or when the property settles.

Figot says that when the government last changed the rules – in 2010 when it switched the former “instalment warrant” rules for the current limited recourse borrowing arrangement (LRBA) rules – it took the view that it was when the loan contract with the lender was signed.

There is no guarantee that they could or would choose a similar definition.

So where would that leave those at varying stages of the buying process now? In particular, what about those who were buying off-the-plan properties that aren’t due to be completed for some time?

In most off-the-plan property developments, banks won’t offer financing until the property is near completion and they can get some sort of reasonable valuation on the property. Buyers are often signing contracts to buy, without secure knowledge that have borrowings to complete the purchase.

“There is a real possibility that the limited recourse borrowing arrangement borrowing exception laws might have been repealed by (the time a building is ready for loan funding),” Figot wrote.

Some trustees will just be living in hope that the rules won’t be changed – and there’s every chance they won’t be.

But Murray’s FSI interim report specifically called for submissions on whether LRBAs, or more specifically borrowing in SMSFs, should be banned. And if you don’t believe that the lobbying power of the APRA-super sector, who are bleeding customers to the now one-million-member strong SMSF sector, you’re living under a mushroom.

Geared property in super is a big drawcard into SMSFs at the moment. It is, unfortunately, attracting some people who shouldn’t be gearing into super (see this column 2/6/14). In my opinion, if you haven’t geared into property outside of super, you probably shouldn’t be gearing into property inside a SMSF.

But from right now … if you are actively looking for, or considering, investing in a geared property inside a SMSF, just be wary that if the rules change, you could be caught in an awkward, and costly, position.


Another grave fear for many is what could happen to higher income earners in regards to their super contributions.

It seems increasingly likely that the higher income earners will not continue to be able to get the big benefits from putting in large licks into super. Someone on the top marginal tax rate and 50 or older, can get $35,000 into super in concessional contributions, saving $11,900 on those contributions (the difference between a 49% MTR and 15% super contributions tax rate) every year.

While those earning less than $18,200 and on a marginal tax rate of 0% actually get penalised at a 15% tax rate (which is subject to government support for LISC continuing).

It could be up for change in Murray’s FSI, potentially with income earners paying something closer to their marginal tax rate on super contributions, even if only above a certain amount.


The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: