SMSF LRBAs should be restricted to securities, says AFMA

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AFMA, Financial System Inquiry (FSI), SMSF Limited Recourse Borrowing Arrangements (LRBAs)The Australian Financial Markets Association (AFMA) has recommended the Government amend the SIS act so that SMSFs can only borrow to purchase “listed and widely held assets or units,” not real estate.

AFMA, which represents banks, stockbrokers and other participants in the financial markets, says this would preserve the intention of the 2007 changes, which were meant to clear up issues with superannuation funds investing in instalment warrants.

The final report of the Financial System Inquiry recommended the Government ban most forms of direct leverage by superannuation funds, including SMSF Limited Recourse Borrowing Arrangements (LRBAs). Much of the attention around LRBAs, and the FSI recommendation, has been on SMSFs investing in property.

In a submission (PDF) on the FSI final report AFMA recommends:

The Government should retain Section 67A of the Superannuation Industry Supervision Act, in respect of limited recourse borrowings to acquire listed and widely held assets or units, as defined in the taxation legislation. Such an amendment would reinstate the initial policy intention of allowing superannuation entities to borrow on a limited recourse basis to invest in instalment warrants.

This would exclude direct residential and commercial property from SMSF LRBAs.

“We see merit in aligning the asset class requirement under the proposed taxation measure to the Government’s response to the recommendation of the Final Report, such that Section 67A is preserved but is only available to the extent that the limited recourse borrowing is in respect of listed and widely held shares or units,” says the AFMA submission.

“The amendment may be easily done through an amendment to the definition of ‘acquirable asset’ in section 67A(2) to include a listed or widely held share or unit, applying the same legislative construction as used in the taxation legislation.”

Though AFMA says that LRBAs should be restricted to securities, the association does not support the blanket ban as recommended by the FSI final report.

“Based on available data, the number and value of current SMSF investments in limited recourse borrowing arrangements cannot be seen as posing a systemic risk to Australia’s financial system, nor could such a risk be posed in the short to medium term,” says the submission.

“In addition, we do not believe that the current levels of investment in limited recourse borrowing arrangements within funds poses significant risk to Australian retirement incomes.”

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