Property 101: Dire OTP consequences to Government's Budget super retrospectivity

Property 101: Dire OTP consequences to Government's Budget super retrospectivity
Property 101: Dire OTP consequences to Government's Budget super retrospectivity

The Federal Coalition is slowly appreciating that the retrospectivity of their Federal Budget SMSF changes has dire consequences.

The Australian reported the federal government would look at situations where people had entered into binding legal contracts who might be hit by the proposed superannuation changes.

The Assistant Treasurer Kelly O’Dwyer said yesterday there will be a period of consultation to make sure there are no unintended consequences from the legislative changes.

“If someone has made a binding legal agreement before budget night, the government will look at that situation in the design of the legislation.’’

Ms O’Dwyer’s comments came as the superannuation industry expressed concern that some people could have entered into binding legal contracts to buy property through their super fund or made other legal arrangements that would be hit by the budget night imposition of a $500,000 cap on post-tax superannuation.

All the government’s proposed changes to super are scheduled to operate from July 1, 2017, except the $500,000 lifetime cap on post-tax contributions, which applies from May 3, budget night.

Ms O’Dwyer said the government had no intention of backing down and rejected calls by Melbourne barrister Jack Hammond QC that people with existing superannuation accounts should be grandfathered from the negative impacts of the changes.

off the plan apartment purchases have real concerns, The Henderson Maxwell financial planner Sam Henderson, wrote in today's Australian Financial Review in an answer to a reader question on super.

The question was: My wife (56) and I (63) are the only trustees of our SMSF, which has about $1 million. I'm retired and my wife has just retired to look after six grandchildren. Last year we entered into a contract within the super fund to buy an off-the-plan apartment ($650,000). Our plan was to put more money into super by selling the investment property, and borrowing, say, $200,000. We did this thinking that after renting it out for, say, six years, we would "in-specie" transfer it out of the super fund to ourselves. The building work has started, with estimated completion in early 2018.

The new Liberal budget has thrown a curve ball into the equation. Assuming the Liberals stay in government and the 2007 retrospective $500,000 non-concessional cap is passed, we could be in serious trouble as we are close to the maximum $500,000. If this happens, I see three choices for us: losing the deposit ($65,000) by reneging on the contract; trying to change the contract to buy the apartment outside the SMSF, or trying to get a bigger loan and proceeding with the original idea. If we take the last option, we still lose as we won't have much left in super and no way to put more in if we do the "in specie" transfer. It seemed like a great idea last year, and we did believe the Liberals would not change super as they promised not to. Have you any suggestions or other options for us? Rob

Hendserson's answer was in part: Rob, you're exactly the reason why retrospective legislation should never be enacted. You are also a good example of what can go wrong in an SMSF by purchasing apartments off the plan, despite your best intentions.

Legislation in superannuation is guaranteed to change over time. While super will always remain a concessionally-taxed savings environment and generally a good place to invest, caution needs to be exercised when purchasing assets over a longer time period. 

Your dilemma is a serious one. If you change the contract, you will almost certainly be up for another round of stamp duty for a change of ownership. If you forfeit your deposit, you are creating a loss of 6.5 percent ($65,000 loss of deposit) for your fund. Make sure you do your research to ensure the property will stand on its own two feet at settlement in all markets with a strong and growing rent, which will be a challenge based on these statistics.

One alternative is to lend the money to your super fund rather than use the bank. You simply establish your own limited recourse borrowing arrangement on commercial terms and lend the money to the fund to avoid the use of further bank funding, all assuming the bank will accept that structure which may be a challenge without personal guarantees. But it's worth considering under expert guidance.

Failing that option, you will need to tap the bank for the settlement amount and hope that its lending policy hasn't changed between now and settlement. Banks have been overhauling their investment lending policies in the past few months so jump on the phone and see what they are willing to do.

Jonathan Chancellor

Jonathan Chancellor

Jonathan Chancellor is one of our authors. Jonathan has been writing about property since the early 1980s and is editor-at-large of Property Observer.

Tags: 
Federal Budget

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