Floods highlight problems with gearing in super

Gearing in self-managed super funds (SMSFs) is one of the most confusing issues for advisers, and the Queensland floods could highlight the need for legislative change, according to BT Financial Group senior manager for technical consulting, Bryan Ashenden.

Referring to queries from BT’s aligned advisers, Ashenden said the most common questions was about gearing in super — including property.

“The biggest concern or the biggest question that advisers ask is whether gearing in super is dead,” he said.

Ashenden said an unintended consequence from the super gearing changes, which were introduced to legitimise the use of an instalment warrants, was that the law did not allow for improvements made to a property held within super that was geared.

“Repairs are okay, but when it’s an improvement that’s got gearing attached to it then certainly the current view of the Australian Taxation Office [ATO] and the legislation is that you can’t make an improvement to a geared asset, because essentially it changes the nature of the asset,” he explained.

Ashenden said it didn’t make sense in the light of the Queensland floods, and advisers were encountering a conundrum when it came to geared property in super that was destroyed or damaged. While the properties could be repaired, Ashenden said there were complications should the trustees seek to use different materials or make improvements that would protect the property from further floods, such as lifting it further off the ground. Such improvements would potentially increase the value of the property, and therefore were not allowed under the law.

“In situations where you should be able to [make improvements] you can’t,” he said.

Ashenden added that there were also unintended consequences of the law in terms of insurance payouts.

“You can’t use that insurance to go out and purchase another property because it’s a different type of asset, and gearing rules in super don’t allow for property to be a replacement asset,” he said. “It works for shares or managed funds, but not for property.”

While the ATO was considering these unintended consequences, it had to apply the rule of law, said Ashenden.

“They don’t have discretion that they can apply in this scenario. So if there is an error or complexity that comes up, there needs to be legislative change,” he said.

Ashenden said he had not heard whether the Treasury had provided any clarity around these issues, although he suspected there would be more debate about it due to the floods.

“So we might see some legislative changes come out to address some of these anomalies that are popping up at the moment,” he said.