The proposed amendments to the Corporations Regulations covering limited recourse borrowing arrangements (LRBA) have the potential to change the operation of the strategies as they stand, a self-managed superannuation fund (SMSF) expert said yesterday.
Earlier this week, the federal government invited submissions from all segments of the superannuation industry to comment on proposed changes, the most significant of which being the treatment of LRBAs as financial products, and the need for any person providing advice on the products to have an Australian financial services licence (AFSL) covering securities or derivatives.
The proposal for LRBAs being treated as financial products includes the premise that all parties entering into one of the gearing strategies be deemed issuers of the product.
"This means the SMSF is an issuer and it has to make sure there is a PDS (product disclosure statement), but an SMSF is specifically exempted from the requirement to have a licence," SMSF Strategies principal Grant Abbott told InvestorDaily.
"The big drama is going to involve the trustees of the holding trust because they are a party to the arrangement, but they do not have the SMSF exemption, so they are going to need to be licensed in order to operate the holding trust."
Furthermore, the need to hold an AFSL to advise on LRBAs could compromise the limited licensing arrangements for accountants anticipated to be included in the last tranche of the Future of Financial Advice reforms, Abbott said.
"Because these arrangements are going to be treated as securities, the limited licence isn't going to cover being able to advise clients on property acquired under one of these borrowing arrangements, which to me is absolutely crazy," he said.
In Abbott's opinion, the focus on treating LRBAs as financial products, because equities or securities were potentially involved, was particularly flawed.
The reasoning behind such a claim was, in his view, that the most recent amendments in legislation had made acquiring property through borrowings, as opposed to shares, more attractive.
Furthermore, the uncertainty surrounding the replacement regime for the accountants' exemption made the call for submissions now a little confusing, he said.
"It's crazy to have this out before the accountants' exemption because you're asked to provide comments on this before you know how the other changes all fit together," he said.
The closing date for submissions is 12 March.
