Budget amendments could spell the end to SMSF property spruikers

SMSF property spruikers will see their business model shaken up as the government moves to end the ability for a trustee to borrow money for residential housing.

The Albanese government announced reforms in last month’s budget, targeting capital gains tax and negative gearing for investment properties, but exempted superannuation funds and SMSFs from any changes.

However, a provision secured by the Greens meant the ability for SMSFs to use limited recourse borrowing arrangements (LRBAs) to purchase property through the fund has been removed, therefore also ending any negative gearing arrangements that would have been exempted inside super.

LRBAs allow SMSFs to borrow money while limiting any credit risk to that particular asset in the case of a default.  

Glasshouse Wealth founder and financial planner Chris Carlin told Professional Planner he can see the merit of LRBAs, but the reality is it often leads to adverse client outcomes.

“There’s some good businesses and good people that are recommending using some of your super to invest in property, but there are plenty of pop-up shops which have got the SMSF set-up, the mortgage brokers, the buyers advocate, to flog a high-rise apartment in a generally not-so-desirable area and the kickbacks to the company itself is pretty significant,” Carlin said.

“Cashing out all of our super from a diversified industry fund or retail fund into one location – whether it’s property, shares or bitcoin – is an ultra-high-risk strategy and people don’t understand that.”

Outside of large-scale industry failures, AFCA has frequently noted that lack of diversification, often via property investments in an SMSF, has been a leading cause of complaint determinations in the client’s favour.

Hamilton Wealth Partners director and principal Kane Baranow said the changes to LRBAs is a good decision as owning residential property in an SMSF is not a sound investment decision.

“Residential property is not a good retirement asset given the yield and the outgoings, we don’t believe they have a role in an SMSF and therefore we see this as a sensible step,” Barnow said.

However, SMSF Association CEO Peter Burgess was critical of totally ending LRBAs to kill off the business model.

“If property spruikers and high-pressure sales tactics are the issue, the answer is to target that conduct directly and not trade away LRBAs investing in residential property just to secure passage of their Federal Budget tax measures,” Burgess said.

“The problem is not the borrowing structure itself, but the conduct of those who aggressively market unsuitable property investments and make unrealistic claims about returns and retirement outcomes.”

SMSF impact

In a media release, the Greens said the LRBA change will be prospective, protect contracts signed before the date of commencement and provide time to finalise arrangements currently in train, by taking effect 45 days after royal assent.

The Greens criticised the grandfathering provision, arguing it will lock in $30 billion in tax “handouts” per year to “wealthy property investors”, keeping 1.7 million homes out of the hands of first home buyers.

Greens leader, Senator Larissa Waters, said the party was glad the government listened to their concerns but their “low ambition” meant that the inequality and the housing crisis will be worse for longer.

“Ending rather than grandfathering these tax breaks today would have helped renters get into a home of their own – but Labor is telling first homebuyers to wait because wealthy property investors haven’t made enough money off the housing crisis,” Waters said.

Greens economic justice spokesperson, Senator Nick McKim, said the changes meant that there will be fewer property investors outbidding renters who want to buy their first home, but argued against grandfathering the reforms.

“Labor’s decision to lock in $33 billion in tax handouts means 1.7 million properties will remain in the hands of property investors, not first homebuyers, and leave renters to continue fighting the housing crisis for longer,” McKim said.

Burgess expressed disappointment that the government agreed to the Greens’ demand.

“Review are after review has found LRBAs pose no material risk to the superannuation system,” Burgess said.

“Banning LRBAs for residential property represents a clear departure from nearly two decades of settled policy.”

Burgess said SMSF trustees have made decisions and commitments based on existing rules and any changes should involve industry consultation and either grandfathering or a “substantially” long implementation period.

“LRBAs are a legitimate investment tool that, when used appropriately and under existing regulatory safeguards, allow individuals to invest in assets through their self-managed superannuation fund that they may not otherwise be able to do,” Burgess said.

More changes after pushback

As currently proposed, the 50 per cent capital gains tax discount across all asset classes would be replaced by cost-base indexation for assets held for more than 12 months, with a 30 per cent minimum tax on net capital gains from 1 July 2027.

The changes will apply to all CGT assets, including pre-1985 CGT assets, held by individuals, trusts and partnerships; however, transitional arrangements will limit the impact on existing investments by ensuring the changes only apply to gains arising on or after 1 July 2027.

Negative gearing arrangements would be grandfathered on existing investment properties, and would only apply for purchases of new build properties.

There will also be a 30 per cent minimum tax introduced on taxable income from discretionary trusts from 1 July 2028, which is estimated to increase tax revenue by a further $4.5 billion over the five years. Beneficiaries, other than corporate beneficiaries, will receive non-refundable credits for the tax payable by the trustee.

However, last week the government announced that income from all types of testamentary trusts will be exempt from the minimum tax.

Hamilton Wealth Partners’s Baranow said scrapping the tax on testamentary trusts makes sense, but the changes don’t go far enough.

“The real problem is confidence: this budget rattled the people who build businesses and take risk, and uncertainty has them sitting on their hands,” Barnow said.

The amended legislation will also remove the Treasurer’s ability to add any additional classes of assets that can become eligible for the 50 per cent CGT discount or prescribe any type of property investment that can be eligible for deducting losses against salary and wage income.

The changes to CGT have received heavy opposition, particularly from the small business and start-up sectors, who have argued they would miss out on compensation via investment returns while foregoing taking a salary.

Small businesses with revenue of $2 million would have been exempted from the changes, but the government agreed last week to increase that threshold to $10 million.