The final report of the Financial System Inquiry (FSI) recommended a prospective ban on most forms of direct leverage by superannuation funds, including SMSF Limited Recourse Borrowing Arrangements (LRBAs)
The SISFA submission in response to the FSI final report says the organisation is concerned that criticisms of SMSF borrowing “may be driven, or encouraged, by certain vested interests within the financial services industry as an attack on SMSFs rather than as an objective discussion of the merits of leverage in the superannuation system.
Instead of a ban SISFA recommends several components of SMSF borrowing which could be improved.
SISFA says the “current ‘bare trust’ or ‘instalment warrant trust’ arrangement is complicated artificial and costly.” Instead these structures should be replaced with standard loan documentation to “remove uncertainties and unnecessary costs generated by the existing security structure and associated compliance complexities.”
Secondly SISFA recommends the removal of the ‘single acquirable asset’ rule, allowing greater scope for modifications and improvements to assets.
Thirdly a statutory safe harbour should be created for related-party loans, which could include “a minimum interest rate, a maximum loan to value ratio, a maximum loan term, etc. to ensure such related party arrangements are not open to abuse.”
SISFA says a “sensible legislative cap on the LVR could be considered for SMSF borrowings to address concerns that SMSFs can currently take too much risk.”
SMSF trustees should also be provided with increased consumer protections from property promoters, according to the submission.
Finally SISFA recommends that personal guarantees remain allowable, saying that “existence of guarantees is no different from other commercial arrangements.”
The Government is currently considering its response to the Financial System Inquiry recommendations.
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