SMSF borrowing could be first investment casualty in new parliament

As the government seeks to get its controversial super tax over the line, the Self Managed Super Fund borrowing sector will be under fresh pressure.

The SMSF sector has powered ahead on the back of rising residential property prices and continued lending to the sector from non-banks. Picture: Getty Images

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The $50bn super borrowing sector could be an early casualty in the new parliament as the ALP seeks to get its controversial super tax across the line in the Senate.

With the government only needing the Greens to pass key legislation in the Senate, and the Greens demanding that borrowing in the Self Managed Super Funds be shut down if they are to support the new super tax, the ability of SMSFs to borrow is now directly under threat.

Concern among advisers and wealth managers is mounting that the government, which needs to pass its new super tax to secure $2.3bn new revenue annually, will do a deal with the Greens, which will terminate an area of activity which has struggled to gain support in recent times.

SMSF Association CEO Peter Burgess says: “We would be very disappointed if the Prime Minister gives in to this request from the Greens in return for support of the new super tax.

“What’s more, we have explained more than once that if this happens, money will flow out of super and back into negatively geared residential property, which actually would push up house prices.”

Despite little political support – and the exit of most banks from lending to SMSFs – the sector has powered ahead on the back of rising residential property prices and continued lending to the sector from non-banks. About one in 10 SMSFs have loans – mostly for property assets. Industry statistics – which are out of date by several years – indicate there is at least $50bn in property borrowing in SMSFs, with residential property at close to 55 per cent.

As one senior adviser said on Monday: “Nobody is going to stand on a hill over lending in SMSFs. The key issue is the nature of the new super tax – the industry is focused on ensuring the tax is not based on unrealised gains.”

The new tax, which imposes a 15 per cent tax on earnings on amounts above $3m, is due to start on July 1, and is to be based on movements in unrealised (paper) gains.

The SMSFA has called for a revised starting time for the new tax – called Division 296 – to give investors time to plan tax arrangements. The first demands for payments under the regulations covers the year to June 30, 2026.

The Greens have campaigned against allowing SMSFs to borrow for investments on the basis that the facility pushes property prices higher, creating an unacceptable financial risk in the super system. However, a Council of Financial Regulators report did not support this claim.

Lending to super funds has been pushed to the margins in recent years after former CBA boss David Murray – in his Murray Inquiry – recommended the abolition of direct leverage in super.

Borrowing in SMSFs is done through Limited Recourse Borrowing Arrangements.

Despite the ability of SMSFs to borrow to finance property investments, the total borrowing activity inside super remains relatively low in relation to the wider value of the residential investment sector. Many investors with SMSFs still to choose to finance property investment outside super to take advantage of negative gearing tax breaks, especially investors who are in the accumulation phase of super with high personal tax rates.

The Albanese administration on Monday appointed Daniel Mulino as Assistant Treasurer and Financial Services Minister, replacing Stephen Jones. He will have a key role in super policy.

James Kirby hosts the twice-weekly Money Puzzle podcast