A SMSF allowance could be closed as part of the haggling over budget tax changes. · Getty
A superannuation “loophole” opened up by the budget is set to be removed as the Albanese government pushes through changes to the capital gains tax (CGT) discount and negative gearing. The legislation still needs to pass the senate but the Greens have announced the party has secured a new “ban” for a certain kind of superannuation borrowing.
The Greens, which hold the balance of power in the senate, had raised concerns about a workaround for millions of Aussies investing in property. In a dissenting report as part of the parliamentary inquiry into the bill, it pointed to the ability for residential real estate to be bought through Self-Managed Superannuation Funds (SMSFs) and not be hit by the higher level of CGT.
The party said it holds “significant concerns that as a result of these changes, people will flock to Self-Managed Superannuation Funds as the remaining vehicle able to purchase tax-advantaged residential properties,” the Greens wrote.
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It pointed to social media, highlighting ads already targeting Australians which are promoting the potential loophole in the wake of the tax hikes in the budget.
“Since the budget there has been a surge of social media advertising that encourages people to ‘turn your super into a property portfolio’, advertising SMSFs as a ‘budget loophole’ and explaining ‘why SMSF is now king’,” the Greens noted.
While superannuation funds are typically not allowed to borrow to purchase assets to avoid systemic risk building up in the system, the party highlighted a 2011 rule change that allowed for an exemption for SMSFs, “enabling limited recourse borrowing arrangements (LRBA) to purchase property.”
Social media ads highlighted by the Greens in their report. · Australian Parliament
In the years since the rule change, there have been multiple calls to previous prime ministers and treasurers to end the allowance within the SMSF system.
“The 2015 Financial Systems Inquiry by Mr David Murray AO (the Murray Review) raised concerns about the rate of growth in LRBAs and recommended reinstating the prohibition,” the Greens noted. “Of the 31 recommendations from the Murray Review, this was the only one that then Treasurer, the Hon Scott Morrison MP rejected.”
Major lenders including the Commonwealth Bank and Westpac also discontinued SMSF lending in 2018.
The Council of Financial Regulators has previously urged Treasurer Josh Frydenberg and current treasurer Jim Chalmers to end the current arrangement. Ahead of the budget in May, Chalmers was also called on to extend the property tax crackdown to those with self managed super.
“We can’t kick this can down the road any more. Now that lead-generators are using social media to push the dream of home ownership through SMSFs, these unique arrangements must finally be closed,” the Greens said in the inquiry report.
According to ATO data, there are more than 1.22 million members of SMSFs in the country and 663,867 registered SMSFs which hold more than $1 trillion in assets. The structure allows for up to six members making them a popular arrangement for couples, families, and even business partners to pool their retirement savings.
Greens and treasurer confirm new SMSF ban coming
On Tuesday, the Greens announced they had resolved to support the changes in the Senate this fortnight with the expectation the government would cave on the SMSF sticking point.
Greens Leader Larissa Waters said the party had secured an amendment to “prevent wealthy property investors from exploiting a loophole to use Self-Managed Super Funds to buy up tax-advantaged investment properties, and removed ministerial discretions that would have allowed a Minister to wind back these reforms”, saying they’ve fought “for decades” to reduce concessions for property investors.
Fronting the media, Greens senator Nick Mckim hailed the victory for the minor party, reiterating it had “secured a ban on Self-Managed Superannuation Funds from borrowing money to purchase residential properties.”
Also speaking to reporters in Canberra, treasurer Jim Chalmers referred to the government’s backdown as “limiting” SMSF borrowing and explained that existing arrangement won’t be impacted.
“Many of you would know that super funds are generally prohibited from borrowing to make investments, but this has been an exception in the system, and so the changes that we have agreed today will strengthen the rules that limit borrowing by superannuation funds,” he said.
“We will ban these arrangements for residential property going forward, but we will leave the existing arrangements in place for those existing investments, and also have a 45-day transition period for any investments which are currently midstream, and that’s important as well.”
Jim Chalmers described it as a ‘worthy change’ despite not originally including it in the budget. · ABC
When asked why Labor didn’t include closing the loophole in the original budget, despite supporting such a move in the past, Chalmers said this proposal goes further.
“This is a worthy change, an important change, but it also reflects the realities in the Senate. Nobody’s got a majority on their own and so we engage in these negotiations,” he said.
“We have supported different versions of this in the past. We took seriously the recommendation from David Murray,” he added.
The government believes the ban will boost its coffers by about $50 million over the next four years.
“When it comes to the fiscal impact, we anticipate something like a $50 million positive impact over the forward estimates, but we will square that away properly in the usual way,” Chalmers said.
Independent senator David Pocock labels tax bill inquiry ‘a bit farcical’
During the short two days of public hearings into what Labor has described as a generational and necessary tax overhaul, vocal critic and fund manager Geoff Wilson who appeared before senators said in his testimony to the inquiry that it was somewhat of a farce.
Independent senator David Pocock shares the same sentiment.
Speaking to ABC radio this morning, he criticised the government over its rushed process, saying while he supports the changes to property the increase to CGT across all assets including shares and businesses “certainly came as a surprise”.
“The inquiry is a bit farcical,” he said. “Two days for such broad changes, I really support the intent of it but clearly with these sorts of changes there’s a lot of finer details that need to be looked at.”
Labor has already backed down to some budget backlash last week announcing bigger carve outs for small business and dropping the 30 per cent minimum CGT on testamentary trusts, which was labelled a ‘death tax’. The SMSF change is the second about-face during the legislative process.
“The fact that the government was announcing changes to its own legislation before the senate had actually given their report says there’s a bit more work to do here,” Pocock said.
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