Property loans in superannuation are now a target

Submissions to Treasury’s review of the new 30 per cent top rate super tax highlight how super investors with investment mortgages will be hit.

If you have a property loan as part of your self managed super fund then you have good reason to be anxious. Picture: David Caird

The planned 30 per cent tax for wealthy super investors could trap tens of thousands of property investors who have used mort­gages in their super funds to ­finance real estate plans.

Property loans, which are most common in self-managed super funds, have been consistently under attack in recent years – often by “big super” lobby groups.

The government said during the last election it would continue to allow property loans inside SMSFs.

But now, under one of the most controversial aspects of the new 30 per cent tax plan – where unrealised gains are taxed on amounts above $3m – investors using property loans in super could be pushed into the new high tax bracket, even if their investments are heavily mortgaged.

If the measure is applied as proposed, the move could effectively divert many everyday investors from going near property loans in their super funds.

Major flaws in the new tax have been highlighted in submissions to a Treasury review of the tax that opened this week. Stakeholders in the super sector have combined to object on several issues, specifically the arrival of the 30 per cent new tax and its $3m threshold, the use of unrealised gains in the new tax, and the decision not to index the threshold. (In practice, the new plan creates an additional 15 per cent tax on super earnings above $3m.)

As a submission from the Institute of Financial Professionals Australia suggests: “Members should not pay extra tax due to their total super balance increasing because they have a loan.”

“It is simply unfair to put a tax on money that has not been made in reality,” says Phil Broderick, a principal at Sladen Legal and a board member of the IFPA.

The inclusion of so-called LRBAs (limited recourse borrowing arrangements) in the new tax is also criticised in a submission from the Self Managed Super Funds Association.

As the association suggests, “in relation to LRBAs, certain amounts included in a member’s total super balance need to be excluded for the purposes of the proposed model”.

There is an estimated $140bn in property holdings inside the SMSF sector, with about $90bn in commercial property and $50bn in residential real estate.

However, the SMSF property sector has been struggling for years, after many of the major banks exited the market. As a result, rates are high and competition is limited for funds involved in property.

The SMSFA has also highlighted the issue that in an SMSF run by a couple, if one dies the surviving member of the fund may find they are instantly hit with the new tax. The association recommends a “deceased member’s interest” will need to be excluded.

Meanwhile, the Financial Services Council has suggested a novel way of managing the new tax. Under existing plans, unrealised gains would be taxed, and unrealised losses would be carried forward in a manner similar to capital gains tax arrangements in other areas. The council suggests super savers liable for the new tax could instead use a special “deferred debt account”.

It has also suggested super savers could be allowed to avoid the new tax under special arrangements on the basis they had invested under certain rules “and will now be subject to new rules”.

Originally published as Property loans in superannuation are now a target