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BFCSA: Coalition says 'NO' to ban on loan borrowing by SMSFs

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Coalition says 'no' to ban on borrowing by SMSFs

Australian Financial Review Mar 22, 2019 5.18pm

Joanna Mather


The Coalition has recommitted to allowing self-managed superannuation funds to borrow for property despite warnings from regulators that the real estate correction could wipe out the nest eggs of some investors.

A new report by the Council of Financial Regulators and Australian Tax Office raises concerns about limited resource [sic; it’s “recourse” –RJB] borrowing arrangements (LBRAs) by SMSFs, especially where an asset such as the family home is used as a guarantee.

“LRBAs can represent a significant risk to some individuals’ retirement savings, particularly where they have low-balance SMSFs with high asset concentration and or personal guarantees,” the report says.

“As the majority of LRBAs are used to purchase real property, a property market correction could post a significant risk, in particular where a personal guarantee is involved.”

Responding to the report, the government said on Friday that it was satisfied SMSFs had low levels of leveraging overall and borrowing should be allowed to continue. Most major lenders have already exited the market.

Labor, which has pledged to ban LRBAs by SMSFs, accused the government of playing down the risks to the financial system and individuals.

“The report is clear that regulators' preferred option is to no longer allow limited recourse borrowing by SMSFs,” shadow treasurer Chris Bowen said.

The report says a blanket ban would reduce risks to both the stability of the financial system and individual retirement savings. But it would limit the investment choices available to SMSFs.

A more targeted approach would to be set a maximum loan-to-value ratio or require investments be spread more widely than a single piece of real estate. But this would introduce further complexity to super laws and could be difficult to implement.

“Where the regulators’ preferred option to remove the exception to allow LBRAs is not accepted, further monitoring to track the future growth of leverage and identified risks within the SMSF environment is recommended,” the report says.

“A further report to government in three years would provide further analysis of the ATO’s enhanced ... data collection and the impact of major banks’ withdrawing from lending to SMSFs.”

The total estimated borrowings, including LRBAs, by SMSFs as at June 2018 was $22 billion, representing 2.9 per cent of $750 billion total SMSF assets, the report says. However, the value of assets held under LRBAs has been growing rapidly and is now estimated at 5.2 per cent compared to 1.8 per cent in 2013.

“Given the high purchase price of real property, this asset class often makes up a large proportion of a SMSFs portfolio – leading to a high level of asset concentration,” the report says.

“As borrowing can magnify losses as well as gains, allocating a large proportion of money to a single asset class or a single asset can endanger a member’s retirement savings, and depending on the age of the member, there may be little opportunity to recoup losses.”


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