The ALP has announced a policy of banning SMSFs from using Limited Recourse Borrowing Arrangements (LRBAs), on a prospective basis.
“Limited recourse borrowing in SMSFs has exploded in recent years – from about $2.5 billion in 2012 to more than $24 billion today. This represents an 860 per cent increase in limited recourse borrowing in SMSFs in just 4½ years. Allowing this to continue would increase risk in the superannuation system and crowd out more first home owners,” said the ALP announcement.
“A Shorten Labor Government will take the responsible decision and adopt the recommendation of the Financial System Inquiry to restore the prohibition on direct borrowing by superannuation funds on a prospective basis.”
“This measure will prevent the unnecessary buildup of risk in Australia’s superannuation system, reduce future calls on the aged pension as a result of a less diversified superannuation system and make the financial system more resilient in the face of potential economic shocks.”
The policy was announced as part of “Labor’s plan for housing affordability and jobs”, but seemingly extends to all SMSF borrowing using LRBAs, not only for housing.
The Financial System Inquiry, which was announced by then Treasurer Joe Hockey, recommended that SMSFs be again prohibited from borrowing to acquire assets.
The final report of the Inquiry said this would “prevent the unnecessary build-up of risk in the superannuation system and the financial system more broadly” and fulfil the objective of superannuation as a savings vehicle for retirement rather than a wealth management tool.
This was the only recommendation of the FSI which was not adopted, in full or in part, by the Government, by which time Scott Morrison was Treasurer.
“While the Government notes that there are anecdotal concerns about limited recourse borrowing arrangements, at this time the Government does not consider the data sufficient to justify significant policy intervention,” said the Government Response to the Financial System Inquiry.
The Labor announcement said: “The Government has simply ignored this recommendation while housing risks have been building in the economy on their watch. Just like how they ignored advice from David Murray to address the “major tax distortions” created by negative gearing and capital gains tax settings, the Government has been asleep at the wheel.”
“Ignoring this recommendation would also leave the budget more exposed over time. As the FSI points out borrowing by superannuation funds implicitly transfers some of the downside risk to taxpayers, who underwrite adverse outcomes in the superannuation system through the provision of the Age Pension.”
The policy announcement says that SMSFs would be banned from most forms of borrowing on a prospective basis, but it does not detail how existing borrowings would be dealt with, for instance if they could refinance.
Stopping LRBAs will help first home buyers: ISA
Industry Super Australia (ISA) has welcomed the ALP policy announcements, saying that banning SMSF borrowing will help first home buyers.
“As recommended by the Financial System Inquiry, the removal of non-recourse borrowing arrangements would not only allow greater access to the housing market for first home-buyers it would also reduce the risks to the financial system posed by the buildup of leverage by SMSFs,” said an ISA statement following the ALP announcement.
Industry Super Australia Chief Economist, Stephen Anthony, said: “Today’s announcement is a welcome proposal on tackling housing affordability concerns where they exist.”
“There is a growing gap between available housing stock and first home buyers seeking to enter the market, this is exacerbated by the current non-recourse borrowing arrangements allowed within self-managed super funds. Removing these arrangements is a positive step forward for system as a whole,” he said.