Ban SMSF Borrowing
The SMSF Association is confident that a “compromise position” can be found for the regulation of SMSF Limited Recourse Borrowing Arrangements (LRBAs) following a recommendation to ban them by the Financial System Inquiry.
Assistant Treasurer Josh Frydenberg has told the SMSF Association national conference in Melbourne there are options available other than banning borrowing by SMSFs.
“We need to get the policy setting right and bear in mind a valid consideration that super is intended to generate a reliable and sustainable retirement income.”
“With an open mind, we will consult with all parties to ensure that we are in a position to make a fully informed decision that serves the best long-term interest of consumers and delivers a financial system which is as resilient as possible to economic and financial shocks.”
The Institute of Public Accountants (IPA) says that “no case has been made” that there is a risk to the superannuation system from SMSF borrowing.
The IPA 2015/16 pre-budget submission argues that instead of a ban there should be a review into ways to mitigate the risks of SMSF borrowings. Other recommendations in the submission include:
- Repeal the 10% rule
- Retain the LISC past the current end date
- Encourage retirees to take income streams from superannuation
Firstly, to clarify what the Financial System Inquiry (FSI) said, the final report recommended banning most forms of direct borrowing in superannuation funds, not only SMSFs. However, as noted in the interim report, direct borrowing in APRA-regulated super funds is very low, at less than “$2 million reported each quarter over the past year.” So, effectively, the recommendation is to ban SMSF borrowing.
There will still be some forms of borrowing allowed if the recommendation is implemented. The FSI recommendation is to remove section 67A from the SIS Act. This is the section which allows Limited Recourse Borrowing Arrangements (LRBAs). Section 67 would remain, which allows some borrowing under very limited circumstances, largely for liquidity purposes.
The Financial System Inquiry final report has recommended banning most forms of direct leverage by superannuation funds as it creates risks for the financial system and is “inconsistent with the objectives of superannuation to be a savings vehicle for retirement income.”
The Financial System Inquiry panel recommends removing section 67A from the SIS Act. This would retain the limited borrowing on a short-term basis contained in s67, but ban SMSF Limited Recourse Borrowing Arrangements (LRBAs).
Banning superannuation borrowing will “prevent the unnecessary build-up of risk in the superannuation system and the financial system more broadly,” and “fulfil the objective for superannuation to be a savings vehicle for retirement income, rather than a broader wealth management vehicle.”