Place limits on SMSF borrowing, says Rice Warner

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Rice Warner - Financial System Inquiry (FSI) - joint superannuation accounts / SMSF borrowingRice Warner has argued that several limits should be placed on SMSF borrowing, which will have the effect of reducing the amount that SMSFs could borrow. This is one of the recommendations included in the second submission by Rice Warner to the Financial System Inquiry (FSI).

Limits on SMSF borrowing

Rice Warner draws a distinction between installment warrants, which have been “generally been well managed with good diversification” and Limited Recourse Borrowing Arrangements (LRBAs), which raise a “number of issues in relation to the provision of retirement incomes.”

Rice Warner have therefore recommended that “prudential guidelines” for LRBAs be published, which would include:

  • A maximum limit on the amount of an SMSF which can be exposed to a single asset
  • Recourse by lenders to extend only to the asset purchased
  • Limits for loan to valuation ratios (LVRs)

“We suggest that the gross asset value (i.e. not net of the outstanding value of any loan secured against the property) of any asset should not exceed 25% of the total asset value of the fund,” said Rice Warner.

Limiting recourse to only the asset purchased would ban personal guarantees for SMSF borrowings, which would likely reduce the amount banks would be willing to lend. Limits on LVRs, depending on the level, would also limit the amount that SMSFs could borrow.

Joint superannuation accounts

Rice Warner also recommends that people be allowed to set up joint superannuation accounts. It appears the intention is that these accounts would operate in a similar manner to joint bank accounts, but for superannuation.

“There are about seven million couples in the superannuation system and that number of accounts could be eliminated if joint accounts were permissible,” said Rice Warner.

Rice Warner has previously said that this “simplified structure for couples, combined with Member Direct investments, would provide many of the benefits of an SMSF. This might appeal to those members who want the flexibility but not the responsibility of running an SMSF.”

However this would require a significant re-write of the SIS Act and regulations. Most of the superannuation rules, such as preservation age, are based upon the details of individual members.

The Financial System Inquiry is progressively releasing submissions received as part of the second round of consultation on its website.

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