SUMMARY: Limited-recourse borrowing arrangements (LRBAs) are under fire on two fronts, as government continues to struggle with post-July super legislation.
If you can believe it, with just 9 days to go, we were still seeing the rules being written for superannuation post 1 July.
I’m not kidding. In the last week of parliament before the Budget, laws were being passed in regards to next financial year’s super changes. Parliament also notably failed to legislate on others that will impact on self-managed super funds.
It was a crazy situation. But if the lack of surety from legislators wasn’t bad enough, SMSFs are copping it from other angles also.
There is now fear that a new round of tightened lending restrictions is on the cards for SMSFs, following an announcement from a SMSF lender that it was raising interest rates and dramatically lowering loan-to-valuation ratios. I’ll return to this.
Eventually, the parliament finally gave certainty surrounding the treatment of transition-to-retirement pensions from 1 July. There were concerns that previous drafts of the legislation made it impossible for TTRs to be moved directly into account-based pensions (ABPs), leaving unintended tax consequences.
From 1 July, TTR pension funds will be taxed as if they were in accumulation phase – that is, at a maximum of 15%.
It will become critical for those who can, to have those TTRs turned into ABPs at the first possible opportunity. The legislation confirmed it will be automatic that TTRs will become ABPs when the member turns 65.
Otherwise, the member will need to let the trustee know when they have met another condition of release, in order to have the TTR converted into an ABP.
Importantly, these are hitting preservation age and permanently retiring, or turning 60 and ending an employment arrangement (ie, quitting a job, or changing jobs after 60). Preservation age is currently a minimum of 57 years of age, but is slowly rising to 60. It will be 60 for anyone born on or after 1 July 1964.
It will be critical for members on TTR pensions to tell trustees as soon as possible of the change in status, to signal the fund is in retirement phase and to stop taxation of the fund.
The legislation also gave some certainty in regards to one aspect of the treatment of limited recourse borrowing arrangements (LRBAs).
Those with LRBAs in place before 1 July 2017 have been spared from rules regarding the repayment of that loan when it is in pension phase. Those who take out loans from the new financial year onwards will have to record, as a credit against their transfer balance cap (TBC) in pension phase any repayments of the LRBA principal or interest that has come from funds held in the accumulation side of the fund.
This was considered a strong positive for those who already have LRBAs in place.
However, the final decision on counting the value of the LRBA in a total superannuation balance was not included in the legislation.
SMSF experts said this was no reason to celebrate. It was almost certain that it has not been dropped, but just postponed, while further details are ironed out.
Big trouble in LRBA land
Of more direct consequence for SMSF LRBA borrowers …
AMP, a reasonable-sized player in the SMSF lending market, this week whacked all of its borrowers with higher interest rates, while massively raising the bar for new potential SMSF borrowers.
Rates for SMSF lenders ratcheted up 0.35% across the board for variable rates, both for new and existing clients.
But it was the new hurdles for SMSFs wanting to buy under LRBAs that came as the biggest surprise. The maximum loan-to-valuation ratio going forward will be 50%, down from 70%. That is, SMSFs will now have to put up more than half of the required funds to purchase a property (if stamp duty is included).
(AMP has also reduced lending for non-SMSF deals to 50% also, so it needs to be put in that context. At those levels, it simply will not attract any clients.)
It is pretty close to a withdrawal from the SMSF lending market by AMP. It won’t entice many applicants with that LVR. And it should be noted that in mid-2015, AMP withdrew, entirely, from the lending to any investors, SMSF or not, for about six months, until late 2015.
One bank changing policies is one thing. The real concern is if this is the start of a new chain reaction from the banks to dealing with the ongoing concerns and orders from the Australian Prudential Regulation Authority that have been gradually increasing since May 2015.
Prior to APRA’s intervention in 2015, most lenders had LVRs at around 80% for residential investment property, with some at 70%.
Since, more lenders now sit at 70% maximum LVR, with a limited few continuing to offer loans at 80%.
While the Government opted not to ban LRBAs in the past, despite having several opportunities to do so … they might not need to. It might happen by stealth.
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 managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: firstname.lastname@example.org . Bruce’s new book, Mortgages Made Easy, is available now.