SMSF borrowing unlikely to be banned, association says

by Julia Corderoy31 Jul 2015
There is unlikely to be a complete ban placed on SMSF borrowing in the wake of the Financial System Inquiry recommendation, an SMSF association has said.

The Financial System Inquiry (FSI) recommended that direct borrowing from SMSFs using limited recourse borrowing arrangements (LRBAs) to purchase property should be prohibited. According to the final report, SMSF lending magnifies risk and can cause a concentration of fund assets. 

However, the director of technical and professional standards at the SMSF Association, Graeme Colley, says there are “positive signals” coming from the government, suggesting that it is unlikely that SMSF borrowing will be banned.

According to the FSI, the amount of funds borrowed using LRBAs has increased 18-fold over five years, from $497 million in June 2009 to $8.7 billion in June 2014. But Colley says the SMSF Association has never agreed that the risks posed by LRBAs justified a total ban.

“As the evidence highlighted in the Intimate with Self-Managed Superannuation report released yesterday showed, LRBAs, as a percentage of total SMSF assets, are still a small percentage of the total pool. They are increasing, but not to a position where they are a threat to the system,” he said, speaking at the Sydney State Technical Conference this week.

“In light of this evidence, the Association's view is that by implementing some measures to mitigate risk, then LRBAs have a viable role to play in SMSFs.”

Such measures may include the licensing of LRBA advice, greater resourcing of ASIC to crack down on spruikers, limiting the use of personal guarantees and establishing best practice guidelines.

However, LRBAs aside, Colley says the SMSF sector is entitled to take a vote of confidence from the final FSI report – which made no other recommendations to curtail their activity.

“The lack of comment about our sector, especially in light of some of the issues raised in its interim report, can only suggest that David Murray and his fellow members of the inquiry, were relaxed about the state of play with SMSFs.

“Perhaps we shouldn't be surprised. In 2010, the Cooper Review came to a similar positive view about the SMSF sector.”

In ANZ’s response to the final report of the FSI, the major bank backed the recommendation to ban SMSF borrowing, saying that this type of borrowing is “incompatible” with the purpose of superannuation.

“ANZ agrees with the recommendation of the FSI in regards to leverage in Self-Managed Superannuation Funds. ANZ has not pursued this activity as part of its mortgages strategy,” the response stated.

“ANZ believes that leverage should be limited in superannuation portfolios and we agree with the RBA and APRA that it is incompatible with the objectives of superannuation.”