The SMSF Professionals’ Association of Australian (SPAA) has raised further concerns over self-managed super funds using a limited recourse borrowing arrangement (LRBA).
The association has urged caution in the use of LRBAs previously and issued a fact sheet on the topic late last year.
The SPAA’s education and professional standards director, Graeme Colley, said it is important people who use the LRBA facility are doing so for the right reasons.
“There is a place for gearing strategies to help people grow their retirement savings, but it’s imperative they understand the risks involved before going down this path,” Colley said.
“People have to understand that a limited recourse borrowing arrangement that doesn’t comply with government regulations can have serious financial consequences for trustees.”
LRBAs shouldn’t be that difficult to implement from a technical viewpoint, but in some cases people misunderstand how they should operate. It is also possible that people who are not SMSF specialists may be advising clients to use a LRBA to purchase property, he added.
Colley said the SPAA also supported a government initiative to have LRBAs designated as a financial product, meaning they could only be advised on by qualified financial planners.
“If this change can be implemented, it will mean that only professionals licensed to provide financial advice can advise on limited recourse borrowing arrangements, and they will be required to consider a client’s complete financial circumstances, not just those that relate to the borrowing arrangement in isolation,” he said.
The SPAA, however, does not agree with a part of the government’s proposal that would lead to LRBAs being treated in the same way as a derivative.
“SPAA contends that the value of a derivative is obtained from the underlying asset, such as options over shares, which is a quite different arrangement to a debt facility that has to be organised to buy an asset for a superannuation fund,” Colley said.
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