End of Limited Recourse Borrowing Arrangements? And a whole lot more!

I do hope so…

In the final report of the Financial System Inquiry undertaken by David Murray, the main recommendation that applies to Self Managed Super is to remove the exception to borrowing for limited recourse borrowing arrangements. I have seen this done wrong so many times and the ATO states that a large percentage of private rulings requests that are receiving for these arrangements have related party components that make the income non arms length income. So lets kill the idea before thousands of SMSFs find that they are non complying due to less than diligent advisors…

SIDE NOTE: If you are considering these arrangements… consider fast. Early next year the government will respond to these recommendations and I would expect them to remove this opportunity…

But the really interesting thing about the report is it has a go at super tax concessions, and then puts the boot into other tax concession… just before the start of a white paper tax review. Coincidence?

Here are some of the other recommendations in the review…

  • Enshrine in legislation the objectives of the superannuation system. If the aim is to keep people off the aged pension then the super system is a total failure. The percentage of aged people who will be on the aged pension has not changed from 1992 and all the modelling says it won’t change. The $30 billion a year in concessions DOES NOT save $30 billon in aged pension costs, no where near it! So if this is the aim of the super system and it is written in the law it will be pretty easy to remove it…
  • Introduce a formal competitive process to allocate new default fund members to MySuper products. This would mean the cheapest fee default fund gets all new My Super members for a period. The Unions are about to scream…
  • Provide all employees with the ability to choose the fund into which their Superannuation Guarantee contributions are paid. Isn’t this the case now? No! Our friendly Unionist, is an EBA, can lock their member and those working in that area who are not members into their some fund and the employee cannot get out! More screaming!
  • Require trustees to pre-select a comprehensive income product for members’ retirement. We all know that if we get our super at 60 and the pension starts (will start for most of us) at 70 we blow our super in ten years and then let the taxpayers fund the rest of our lives. This idea is to discourage lump sums over annuity products. Don’t worry it does not apply to SMSFs;

Here are some of the “observation” that are aimed straight at the tax review…

  • Aligning the earnings tax rate across the accumulation and retirement phases.
  • Options to better target superannuation tax concessions to the objectives of the superannuation system. In other words, get rid of most of the concession.
  • Lowering the non-concessional contribution cap or having a cap on funds held in super and requiring members to take amounts out of super above these caps.
  • Reduce the CGT discount to limit the benefit of negatively geared properties (Some journalist AGAIN are banging on about negative gearing when it is not the deductions that are the problem but the capital concessions).
  • Remove imputation – After you show me how you unscramble an egg. Get over it as it is not going to happen!
  • Make financial supplies taxable supplies for GST. This might work as it will be argued this is “picking on the evil banks”. But don’t worry, someone will say “unfair” and the media will forget to look at the real policy discussion and report what the latest polly said on twitter about it.

Sounds like a great start for a tax review when there is a $40 billion structural deficit and a crazy Senate…

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About Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.
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