Labor’s proposal to ban limited recourse borrowing arrangements (LRBAs) by SMSFs to purchase property has the backing of Financial System Inquiry chair David Murray.
Mr Murray’s final report in December 2014 recommended the restoration of the prohibition on SMSF borrowing that was lifted in 2007.
The report stated, “Further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system.”
Industry fund lobby group the Australian Institute of Superannuation Trustees (AIST) was quick to welcome the new measures, saying it would “reduce competition from investors and also help reduce risk in the super sector”.
AIST chief executive Eva Scheerlinck said, “Banning recourse borrowing by SMSFs was recommended by the Financial System Inquiry with good reason.
“Allowing SMSFs to take on extra risk through borrowing potentially affects everyone as it is the taxpayer who ultimately underwrites this risk through the provision of the age pension when things go wrong.”
But the SMSF Association noted that the Coalition government rejected Mr Murray’s recommendations to reinstate the ban on SMSF borrowing in 2015, and “there is no compelling argument to suggest anything has changed since regarding LRBAs”.
“The most recent Australian Tax Office statistics show that SMSFs hold $24.3 billion in LRBAs, with these financial instruments being predominantly used to invest in residential and non-residential property in an almost 50-50 split,” said SMSF Association chief executive Andrea Slattery.
“That estimated $12 billion where SMSFs have used LRBAs to invest in residential housing has to be put in the context of a $6.43 trillion housing market. In other words, LRBAs comprise only 0.18 per cent of the market. On these figures, it’s hard to argue LRBAs are a ‘market mover’,” Ms Slattery said.
“The idea that SMSFs have plunged into property investment in recent times also is not borne out by the statistics, with SMSF residential property holdings (both geared and ungeared) being consistent between 4-6 per cent of total SMSF assets in recent times.”
Let’s be clear on one thing; Labor has vested interests with the Union controlled ISA funds. Anything that hampers the SMSF ability to be more appealing is literally financially beneficial to Labor and the Unions.
ISA hate LRBA’s and you are spot on with your comment John M.
Labor and it’s grubby Unions hate loosing money to SMSF’s with or without a LRBA.
And if ISA actually provided an administration service that could be used by professional advisers then we may use their funds. However, as they are so anti adviser’s they simply won’t provide an efficient service that works for the adviser to use for clients.
And using the heated housing market as the excuse to ban LRBA’s is just selective commentry that covers the real Union grubby agenda.
yep, the real aim is Union Super Funds controlling the superannuation space. Funny how they’ve run ads on telly with a fox when it’s really the unions and the Labor party that are the foxes in the hen house. Would you really trust your super to a union rep from the CFMEU or the Health Services Union???
Put your name against your comment… Are you now saying that gearing within an SMSF should not be allowed at all? that would of course include gearing for the purchase of shares or any other financial product.
I think your comment is a ridiculous one off statement. You are aware of course that loans to SMSFs needed to be in the interests of the members of the fund, and, as long as they are then these are completely legal and well within the meaning of the SIS Act.
Yep. Precisely. Just because it’s legal doesn’t mean that it’s sensible. And yes I am aware that loans to SMSFs need to be in the interests of the members. Which is why when/if there is a property correction, all the average Joes who lose money will be crying waa, waa, waa to A Current Affair & Four Corners & Fairfax (if it still exists then). And all the SMSF advisers who put them in it will cop the blame. It will be even worse if, god forbid, anyone loses their family home due to personal guarantees they made on their super fund loan.
Of course Labor & AIST are speaking for the blatant self interest of their union official masters, but for once that self interest happily coincides with the interests of the broader public, and confidence in the superannuation system. I’m very happy to cross the idealogical floor and side with the unions on this one.
Agree Stephen. Banning gearing in super is akin to banning cars to reduce the road death toll; linked but nonsensical to take drastic action for such a silly ‘reason’. Gearing can be beneficial i.e. a business professional looking to buy their commercial business premises within the SMSF and all the associated benefits this has (yes, bearing in mind risks and other available options etc).
To ban this for everyone based on such a pathetic rationale is absurd.[b] Labor would have at least some credibility if instead they said they were looking to “revise the rules around LRBT to exclude residential housing in x, y or z circumstances”.[/b] But of course that alone would not suit their real agenda.
“…has to be put in the context of a $6.43 trillion housing market”. What is the basis of this comment? Where does the $6.43 trillion amount come from?
I too agree that LRBAs from SMSFs should be banned. People should not be using the superannuation system to gear investments. Sometimes you need to save people from themselves and in my opinion, based on some of the clients I have seen, there are too many people using SMSFs that should not be using them.
That’s your opinion Damien and you are free to advise clients in whatever manner you see fit. However, dont limit the capacity of other advisers and other investors to follow a path that has been proven to work when the right parameters are in place. Gearing into any growth investment such as shares or property has long been a successful path to wealth creation. Doing it in super where the tax leakage is lower, the cashflows are more assured, and the time frames are long is a perfect framework for a responsible gearing strategy. Most LRBAs are in the 50-70% range, most come with good cash buffers to counter against any temporary setbacks of no tenants or employer contributions, most have appropriate personal insurances in place and most have a diversified pool of liquid investments that provides some asset diversification away from the property. I’m sure that like all things there are some SMSF’s that are not setup like this but i would generally say that these have been set-up without the assistance of an IFA and were either done online by the client on their own or via their accountant while they still operated under an ‘exemption’. I’ve seen a few of those that have low overall balances, almost no or very small cash buffers, no diversification of investments (because accountants couldnt advise on those) and no insurance (again because accountants couldnt advise on those either or just didnt believe in it).
Your kidding me? I think one of the best strategies for those under 50….. gear up your super and purchase a property. Who is the labour party to tell me what is and isn’t a good investment!
For once the Labor Party and the Union Super lobby group (AIST) have got it right. The ability to borrow by SMSFs was never intended, and only exists due to exploitation of a loophole. Time to close the loophole and bring back some sanity and integrity to the SMSF madness.
I disagree, Anonymous. Gearing inside superannuation is fine if risks and cashflow are known and there are limits to the LVR. If a fund manager can gear their share funds inside super, why not SMSF’s? After all, SMSF’s are merely a tax structure around retirement savings and should be able to invest in any worthwhile enterprise just as an ordinary, non-super, tax structure can. There is almost no effect on house pricing by stopping it so it doesn’t support that issue. I think the Labor & AIST are only about themselves and getting hold of more money. hard to do that when SMSF’s can invest so broadly.