Concern grows for 'risky' SMSF borrowing

by Julia Corderoy22 Dec 2014
As the number of self-managed super funds continues to grow, so too may the concern over risky direct borrowing arrangements by superannuation funds.

According to the Self-Managed Superannuation Funds: A Statistical Overview 2012-13 report released last week by the ATO, the number of SMSFs has ballooned by 29% to 534,000 in five years – and majority of them are in “accumulation phase”, whereby members are working to amass  their superannuation investment portfolio.

This may be worrying for David Murray’s Financial Services Inquiry, which expressed concern over the emerging trend of SMSFs using direct borrowing arrangements to purchase assets for its portfolio. The final report recommended that the government should restore the general prohibition on direct borrowing for limited recourse borrowing arrangements (LRBA) by superannuation funds. 

“Borrowing, even with LRBAs, magnifies the gains and losses from fluctuations in the prices of assets held in funds and increases the probability of large losses within a fund. Because of the higher risks associated with limited recourse lending, lenders can charge higher interest rates and frequently require personal guarantees from trustees,” the FSI stated.

SMSFs are prohibited from borrowing money, except in certain limited circumstances – such as LRBAs – which are permitted under the SIS Act. According to the ATO report, SMSF borrowing is increasing with the number of funds.

The report reveals that assets held under LRBAs increased to $8.3 billion, or 1.68% of total SMSF assets in 2013, up from $497 million or 0.15% of total SMSF assets in 2009.

However, despite the value of LRBA investments increasing, the report also revealed that only 2.7% of SMSFs reported assets held under this type of agreement. The majority of the funds holding LRBA investments were in Australian residential real property (51%) and Australian non-residential real property (28%).
 

COMMENTS

  • by John from Geelong 22/12/2014 9:08:10 AM

    I am nervous about the quality of assets acquired in SMSF lending, here are two solutions:

    Ban any advertising that a development is 'perfect for SMSL' (it is financial advice, after all) and limit LVRs to a lower level than currently permitted.

    I really like the Librty policy that property must be two years old.

  • by George Peat 22/12/2014 11:05:19 AM

    Its interesting that the negative hope create around the LRBA is from those who don't make commissions/earnings from this type of investments. Lets have a chat about how mismanagement of funds have created large losses for many Australians hoping to have something to retire on. Leave SMSF's alone. You have had decades to manage peoples funds and lets be honest the average Australian hasn't achieved much from this management.