I can’t help but wonder when I read the newspapers and industry comment regarding borrowing in Super, whether the regulators and legislation are creating the perfect storm for improper and/or risky behaviour. These same parties will then use this behaviour as justification for taking the ability to borrow away from SMSFs.
As I have written in previous blogs, there is no greater mechanism to drive demand for a particular product or strategy, than to threaten to take it away. The uncertainty about the retention of the borrowing rules does nothing other than create an atmosphere where trustees will rush into a decision, lest the decision be made for them and they miss an opportunity. So the uncertainty is the first major influence which I think will elevate demand.People are concerned about having adequate savings for their retirement. The government has systematically undermined SMSF savings capacities in recent years to the point that tax effective savings cannot provide adequacy for most SMSF members. Not only are the concessional caps unreasonably low, but if the proposed mechanism for accessing the increased contribution caps post 50 come in, it will place a disincentive to make non-concessional contributions. This is the second major influence because in the absence of being able to save directly, gearing becomes a more attractive long term strategy.
The third major influence is the continued exclusion of property being considered a financial product under the corporations act. What this means is that it can be advised on without a license. That’s not to say that the advising community is all roses either, but at least there are some protections with regard to the outlandish promises that are often made by property sellers. They are allowed to make baseless promotional statements because there are no rules to the contrary, and at least a licensing regime would slow this down if not eradicate it.
The fourth major influence is that the rules have been overly technical. Why? Because it appears to be a governmental position that anyone using this strategy is trying to flaunt the rules and so the rules must be very, very tight. But what sort of lunacy creates a rule whereby if your insured property burns down, you would not be allowed to rebuild it using the insurance proceeds? Or if a long term tenant wanted minor improvements to sign a new long term contract, you would have to say no, or unwind your savings structures at great cost? There may be technical ways around this, but they are technical and the structures involved introduce further technical issues and opportunities for non-compliance.
My fear is that feedback from the regulators will be that too many people are entering into borrowing arrangements than would normally be considered prudent, that demand for SMSF borrowing seems too great, that the markets are marketing specifically to SMSF trustees in inappropriate ways, and that compliance problems within SMSF funds with borrowing is disproportionately high. The legislature will then say, ‘We knew it’ and take the easy way out and cancel borrowing within SMSFs (after all they aren’t trying to sell Telstra again).
What they need to do is provide certainty that the ability is not going to go away. They need to allow the structures to be flexible so that all normal activities that a prudent investor with borrowing needs to be able to do are possible. With this comes an acceptance that some people just can’t be saved from themselves – they will borrow too much or push the rules too far, but there exist other provisions of the SISA which can and will deal with this. They need to address the current low standard of marketing, perhaps not of the borrowing structure itself but of its most common target, property. Finally, if they don’t want people to feel the pressure to borrow, Legislature needs to enhance savings capacity in the absence of borrowing. If they did even some of these things, behaviour would moderate and the strategy would simply become what it should be – a worthwhile consideration in a limited number of circumstances.
