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Limited Recourse Borrowing Arrangement Noise (RG146)

Part I of III

The finance wise RG146 course is designed to help accountants navigate the accounting exemption expiry.  One of the activities we conduct on Day One of the RG146 course is to gaze into to Crystal Ball we ask attendees what they believe SMSF’s will look like in 2020.

Happily our first group predicted that there would be no change. I am not so sure …

In recent weeks there has been quite a bit of activity in the Limited Recourse Borrowing Arrangement (LRBA) space.

Over a series of three articles we will take a look, along with Peter Kelly from Centrepoint Alliance’s assistance.

Financial System Inquiry

The Government responded to the recommendations of the Financial System Inquiry (FSI).  To recap, when the Inquiry made its recommendations to the Government in November 2014, Recommendation 8 foreshadowed some bad news for LRBAs.

Recommendation 8 stated:

“remove the exemption to the general prohibition of direct borrowing for limited recourse borrowing arrangements by superannuation funds.”

However, in its response, the Government made the following comments:

“The Government does not agree with the Inquiry’s recommendation to prohibit limited recourse borrowing arrangements by superannuation funds.

While the Government notes that there are anecdotal concerns about limited recourse borrowing arrangements, at this time the Government does not consider the data sufficient to justify significant policy intervention.

The Government will however commission the Council of Financial Regulators and the Australian Taxation Office (ATO) to monitor leverage and risk in the superannuation system and report back to Government after three years.

The timing allows recent improvements in ATO data collection to wash through the system. The agencies’ analysis will be used to inform any consideration of whether changes to the borrowing regulations might be appropriate.”

The Inquiry’s recommendation was rejected by the government so … happy days. However, keep the champagne corks in the bottles because the story doesn’t end there.

A closer examination of the Government’s response reveals that the decision not to remove the current exemption is driven more by the fact there is insufficient information, rather than being seen as the Government’s tacit acceptance of such arrangements and has reserved its right to review the situation again in three years’ time.

Finance Wise Global Securities Pty Ltd (AFSL No: 397877) is Australia’s leading provider of licensing services to Accountants seeking a simple, clear and cost effective solution to transition into the new landscape on July 1st, 2016.

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Senate passes new legislation on LRBAs (RG146)

A critical component of the fwgs RG146 training course is the changing landscape of LRBA’s.

Our RG146 course offers a unique and current insight into this topic because fwgs has recently contracted on a new office and a related entity has been hard at work securing an LRBA to fund about 60% of the purchase.

We have been surprised at the level of credit expertise across a wide variety of lenders including a recent SMSF Award winning lender.

We were stunned that a lender took 10 working days to complete a credit submission when all of the information requested was provided on day 1. We were prepared to be patient as this particular lender’s variable rate is over 110 basis points lower than the next best.

However, this will put pressure on every other aspect of the purchase; not to mention that the subject to finance clause was due on the day that the lender submitted the application to their credit team.

As a reminder when borrowing – an SMSF is required to establish a custodian trust and there has been some confusion about whether the holding trust is a taxable entity in its own right.

The legislation passed both the House of Representatives and the Senate on 7 September and is now awaiting royal assent.

The bill states that for taxation purposes (i.e. income tax, capital gains tax and GST) trustees treat the arrangements as if the property is held directly via the super fund.

This tidies up the method used by accountants in practice, and as long as the fund is complying and the arrangement qualifies as a LRBA, the tax uncertainties have been addressed.

An unintended consequence is the sound argument to the proposition that loans that are more favourable to SMSFs and are made at less than commercial rates are in accordance with the SMSF and tax laws!   Of course all loans should be fully and properly documented between the parties to accord with the laws pertaining to SMSFs.   So low or no interest rate loans made by a related party (you or your family trust) to your SMSF to acquire one or a series of single acquirable assets is acceptable in view of this change in the law but it is vital to seek advice.

Our RG146 course is a two-day facilitator led training program. We understand the difficulty accountants have with time so our philosophy is that we come to the accountant. Our first RG146 course is being held in NSW on October 7 and 8 and costs $1,250.00. To register please send an email to info@fwgs.net.au

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Beware of Credit “hawking” risks, accountants told (RG146)

Article continued from yesterday …

Mr Lindsay added that “the challenge for accountants is to understand where those lines are, and to understand very clearly what they’re licensed to provide and what they’re licensed to be able to discuss”.

Ms Lumsden Kelly said accountants risk violating prohibitions in the Corporations Act by overstepping their advisory boundaries and spruiking products and services related to self-managed super funds which they are not licensed for.

“It’s strictly a Corporations Act requirement,” she said. “This requirement has never applied to them [accountants) in the past so it’s essentially a new requirement that’s going to apply to them once they obtain a limited licence, or even if they choose to become an authorised representative of another licensee.”

However, the lines are blurred when determining whether advice is solicited or unsolicited, noted Ms Lumsden Kelly.

“I think that’s where the accountants are more likely to fall afoul of hawking – it’s less clear,” she said. “Has the client made a positive request? What was it that actually triggered that request, and was it reasonable in the context of the conversation that was being had?”

The “alarming” lack of accountants obtaining licences has resulted in a failure to address any post-licensing compliance obligations, according to Ms Lumsden Kelly.

“It is something that should be in a set of standard policies and procedures that an accountant implements into their practice, but the degree to which that is done effectively in the mad scramble to get a licence is questionable,” she added.

An ASIC crackdown could result in problems for accountants who fail to properly educate themselves about their new obligations, she said.

“If there’s a high level of ignorance about the obligation, which we are obviously at risk of because of the time pressures, there is scope for it to be breached a lot,” she concluded.

Our RG146 course is a two-day facilitator lead training program. We understand the difficulty accountants have with time so our philosophy is that we come to the accountant. Our first RG146 course is being held in NSW on October 7 and 8 and costs $1,250.00. To register please send an email to info@fwgs.net.au

Source: SMSF Adviser Written by Mitchell Turner Monday, 14 September 2015

If you found this article interesting, why not

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