The big super funds are targeting self-managed super – a popular choice for small business owners – over burgeoning borrowing for property investment. And the push is on to make the $20,000 write-down facility permanent. Here’s what to watch for in next month’s Federal Budget.
It’s shaping up as the battle of the big guns against the little guys.
The big super funds are calling for a crackdown on self-managed super funds (SMSFs) borrowing to invest in property.
It puts at risk an increasingly popular wealth-creation strategy for business owners: to use Limited Recourse Borrowing Arrangements (LRBA) to buy their own commercial premises through SMSFs.
In the past 10 years, banks and non-bank lenders have been issuing loans products to target the growing SMSF market, promoting them as a way for business owners to buy commercial premises through their super fund.
In a pre-budget submission, the big super funds’ peak body, The Association of Superannuation Funds of Australia (ASFA), has called on the government to end direct borrowing by superannuation funds because it is becoming too risky.
“The amount of funds borrowed using LRBAs has increased substantially from $497 million in June 2009 to $25.4 billion in June 2016, an increase of around 5,000 per cent,” the ASFA submission states.
The submission argues direct borrowing, even through LRBAs, puts retirement savings at risk
if investments go south. Taxpayers may end up carrying the can, through the provision of aged pensions, the ASFA claims.
The association acknowledges only about seven per cent of SMSFs were currently using LRBAs,
but it states half of these had more than 80 per cent of the fund’s total assets in LRBAs.
“This indicates a lack of diversification within such funds.”
The big super funds’ position echoes that of David Murray’s 2014 Financial System Inquiry, which also recommended an end to direct borrowing through superannuation.
Acknowledging the difficulty of unwinding existing arrangements, the ASFA pre-budget submissions calls for an end to borrowing, leaving current loans in place.
“ASFA considers any changes to the arrangements should involve removing the ability to enter into LRBA arrangements in the future,” the submission states.
With the 2018/19 Budget to be handed down on May 8, the big super funds are also hoping the government will crack down on sham contracting.
The rise of the ‘gig economy’ has many in the industry, and in government, concerned about stagnant super balances. To that end, the ASFA submission also urges the government to increase penalties and lower the bar for prosecuting business caught using sham contracting arrangements.
If a worker is classified as a contractor, rather than employee, businesses are not obliged to pay benefits such as superannuation or annual leave. While more flexible work practices have caused confusion, many employers have been found to have deliberately misrepresented staff to avoid super obligations.
The legislation currently requires the employer’s error to have been reckless, but ASFA backs a Productivity Commission call for the Fair Work Act to be amended to allow prosecution where the classification was something an employer could be reasonably expected to know.
In other pre-budget submissions, small business industry groups are pushing to have the government’s popular $20,000 instant asset write-off scheme for small business made permanent. At present, it is set to end on June 30, reverting to $1,000.
Introduced in the 2015/16 budget, the write-down facility aims to encourage small businesses
with turnover up to $10 million to invest in new equipment by allowing them to claim accelerated depreciation on items up to $20,000 in value.
Tax and Super Australia, which represents tax agents, argue in their pre-budget submission that constantly changing thresholds cause confusion for SMEs and the $20,000 limit should not merely be extended, as was done in 2017/18, but made permanent.
“This ($20,000) threshold is having a real effect in the small business community in both encouraging investment in productive assets and reducing compliance burdens,” the submission states.
The Council of Small Business Australia (COSBOA) also supports making the $20,000 threshold permanent, and renews its support for the establishment of a small business investment allowance
to facilitate greater deductions on assets above $20,000 and up to $2 million.
On the productivity front, COSBOA also calls for mental health programs aimed at small business owners and the introduction of federally-funded domestic violence leave, which could be more impactful for small businesses that often lacked the resources to respond effectively.
Pre-budget submission from a range of industry and interest groups can be viewed on the Treasury website.