Anger grows over SMSF lending ban proposal

Mortgage brokers have been left blindsided following Labor’s announcement of a planned ban on residential SMSF investing.

The Australian federal government will ban SMSFs from using limited recourse borrowing arrangements (LRBAs) to purchase residential property, after reaching a deal with the Greens to pass its Budget tax legislation through the Senate.

Treasurer Jim Chalmers confirmed the change in Canberra on Tuesday, saying the measure would "strengthen the rules that limit borrowing by superannuation funds”.

For others, it removes an important investment vehicle that was seen as a viable workaround in the face of Labor’s negative gearing and capital gains tax (CGT) discount crackdown.

Investing in property – both commercial and residential – through an SMSF historically came with substantial tax benefits and was exempt from incoming negative gearing and CGT changes. 

With the announcement of the ban, brokers and their clients have been left with even fewer avenues for investing in residential property (commercial property investing will still be allowed).

“This is absolutely disgusting from this government,” one broking industry leader said.

“It’s another smack in the face for hard working Aussies striving to self fund their retirement,” said another.

“The policy isn’t well planned, or thought out either… I don’t think the ALP are reading the tea leaves!” said FirstPoint Mortgage Brokers managing partner Troy Phillips.

Money Lounge mortgage broker Maddie Walton spent Tuesday afternoon scrambling to contact her clients with pre-approved SMSF loans.

“The key now is ensuring those clients have access to quality advice and alternative pathways to build long-term wealth. This won't materially change housing affordability, but it will materially change the options available to some retirement investors,” said Walton.

“The question is what impact the change will have on Australians approaching retirement who were considering property as part of their long-term superannuation strategy? For myself and other finance professionals, the focus will be shifting to helping clients understand their alternatives and ensuring they continue to make informed decisions that align with their retirement goals,” Walton added.

Reality check on SMSF lending

SMSF lending is not a gigantic market.

Talking with MPA following today’s bombshell announcement, SMSF guru and Bluestone Home Loans head of specialised distribution Richard Chesworth said the proposal had come as a surprise, arguing the scale of SMSF property lending did not justify a blanket ban.

SMSF lending was introduced in September 2007 and currently comprises just $25 billion worth of borrowings in that market.

Since then, the major banks have exited the SMSF lending market, leaving it in the hands of Australia’s growing cohort of non-bank lenders, including Bluestone, Pepper Money and Resimac.

AMP Bank made headlines earlier this year when it became the first traditional lender to re-enter the SMSF lending market following an eight-year hiatus. An AMP Bank spokesperson told MPA: "We note the Government’s announcement today and await the final details. In the meantime, we will continue to support our existing SMSF borrowers and will assist brokers on the transition as new requirements come into effect."

“It is not a systemic issue,” continued Chesworth, noting that the sector had already been examined at the highest regulatory level, pointing to two reviews by the Council of Financial Regulators that had both concluded SMSF borrowing posed no systemic risk.

He added that the $25 billion in SMSF loan balances was secured against approximately $70 billion in assets – a figure that, if confirmed, would place the sector's loan-to-value ratio well below mainstream residential lending benchmarks.

Chesworth estimated that roughly half of the $25 billion in SMSF borrowings relates to residential property, putting the residential component at around $12 billion to $13 billion – a rounding error in Australia's multi-trillion-dollar residential mortgage market.

“It's a behavioral issue, it's not an SMSF issue,” said Chesworth. He pointed to unlicensed property promoters and marketing firms operating on the fringes of the superannuation sector, using social media to push property investments while collecting high commissions – activity he said had been fuelling concern among regulators without reflecting how licensed professionals operate within the SMSF lending space in the first place.

Another backtrack?

Labor risks outrage mounting even further outrage for what amounts to an added $50 million tax revenue, per the party’s own forecasts.

In response to a grilling on why the measures weren’t announced in the initial 12 May Budget announcement, Chalmers framed it as part of negotiations to get the Budget Bill over the line.

The move is likely to galvanise Labor’s political opponents, who have framed the party as untrustworthy and prone to breaking promises.

While a ban on SMSF lending had been on Labor’s agenda in the past (under previous administrations), Chalmers shot down the idea in 2022. The idea was scrapped following Labor’s drubbing in the 2019 election.

Today, Chalmers said: “We have supported different versions of this in the past. We took seriously the recommendation from David Murray, you know, hardly a scorched earth left wing revolutionary, who said in 2014 that we should ban these.

“We’ve examined those recommendations before, and from the Council of Financial Regulators, and so we think this is an important change in its own right. It’s a little bit different to the proposal that we took to the 2019 election.”

Unlike the 2019 proposal, these newly announced measures only apply to residential, not commercial properties.

An attack on choice

Blake Buchanan, general manager of Specialist Finance Group (SFG), said the proposed LRBA changes are another disappointing attack on Australians seeking to take control of their own financial future.

"SMSFs have long provided Australians with choice and flexibility in how they invest for retirement. Restricting borrowing within super doesn't create more opportunity – it simply pushes more Australians towards large industry and retail super funds and away from having a direct say over how their retirement savings are invested,” said Buchanan.

"Australians work hard for their superannuation. They should have the right to make informed decisions about how that money is invested, including through property, provided they operate within an appropriately regulated framework."

Buchanan noted that the changes have yet to be passed into law and there remains uncertainty around how and when they will be implemented. “I don't believe there is a clear mandate for further restricting investment choice, particularly at a time when Australians are already facing growing barriers to wealth creation,” he said.

MPA will provide further updates and the story progresses.