FSI Submissions – SMSF Borrowing and LRBAs

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The Financial System Inquiry (the Murray Inquiry) has begun to release the submissions received, many of them make recommendations about SMSF borrowing and Limited-Recourse Borrowing Arrangements (LRBAs).

The Financial Planning Association (FPA), noting that SMSF borrowing has been a ‘controversial issue’ with implications for the residential property market, recommends ‘the Government follows Cooper’s recommendation and undertakes a formal review of the decision to allow SMSFs to gear up property in their fund. ‘

CPA Australia also supports a review into the ‘appropriate use of borrowing’ including relating to SMSFs. Noting that SMSF borrowing can contribute to wealth creation, but were concerned that SMSF trustees only use borrowing as part of ‘a properly formulated and prudent investment strategy’. CPA also displayed concern regarding the advice and ‘misinformation’ SMSF trustees may be receiving from participants in the property section, including ‘real estate agents, mortgage brokers and property developers’.

The Institute of Chartered Accountants Australia (ICAA) also support a review of borrowing in SMSFs, with a dual purpose:

  1. ‘to ascertain whether borrowing in super is appropriate or not’, and
  2. ‘to ensure we have the right legislative and regulatory framework around it’

The ICAA noted that The Cooper Review Panel ‘did not believe that borrowing was consistent with Australia’s retirement incomes policy’

The Australian Shareholders Association (ASA) used their submission to urge the government to consider restrictions on the ability of SMSFs to borrow, over concern that ‘superannuants are being beguiled into investing their superannuation funds into geared real estate’, and that this presented diversification, liquidity and risk issues for the fund and may be the result of ‘inappropriate marketing’. The ASA was also concerned regarding the training and qualifications (or lack thereof) of real estate agents proposing real estate investments to SMSF trustees.

The SMSF Owners Alliance also used their submission to urge the government to ‘undertakes a formal review of the decision to allow SMSFs to gear up property in their fund.’ They also noted, as a number of the other submissions have done, that only 3.5% of SMSF assets are invested in property and this figure has remained stable for the last 5 years.

The Switzer Financial Group Pty Ltd recommends against changing s67A and s67B, as investments by SMSF in property represent a small amount of total assets and don’t exceed a reasonable asset allocation, noting that ‘borrowing by SMSFs to invest in residential property is not fueling the current property boom’.

The Superannuation Professionals Association of Australia (SPAA) believes that LRBAs do not ‘pose a systemic risk to the Australian financial system’ and the ‘vast majority of SMSF LRBAs are being made soundly and responsibly’ though SPAA have separately supported a review into SMSF borrowing. SPAA did use the submission to raise concerns regarding the promotion of LRBAs:

“SPAA believes that these risks inherent in LRBA investment strategies are not always properly being explained to SMSF trustees and that in some cases LRBAs are being promoted to trustees where the strategy is not suitable for the circumstances of the SMSF’s members”

As a solution SPAA proposes moving LRBAs under the financial advice regime, which was the topic of a treasury consultation with draft legislation, however SPAA described these as containing ‘a number of shortcomings’.

The submissions to the Financial System Inquiry can be found on the inquiry’s’ website.

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