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%).