SMSF Borrowing

SMSF borrowing on ATO’s radar, says Assistant Commissioner

SMSF borrowing, ATO Assistant Commissioner for superannuation, minimum pension paymentSMSF borrowings which contravene the SIS Act and regulations are on the ATO’s radar.

ATO Assistant Commissioner for superannuation, Matthew Bambrick, told the Tax Institute Annual Superannuation Intensive Conference that the ATO is “concerned that some organisations are promoting arrangements where SMSF assets provide members with a current-day benefit.”

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Other options than banning SMSF borrowing: Assistant Treasurer

SMSF borrowing, LRBA, Assistant Treasurer Josh FrydenbergAssistant 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.”

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Safe harbour provision for low interest rate SMSF LRBAs

safe harbour, Non-Arm's Length Income (NALI), low interest, zero interest, SMSF borrowing, LRBAsIn order to remove uncertainty surrounding low, or zero, interest rate LRBAs and the non-arm’s length income rules the Government should create a safe harbour provision.

It is unclear where the idea for 0% interest rate LRBA started, through the June 2012 meeting of the superannuation technical National Tax Liason Group was likely a key point. In this meeting the ATO was asked if zero interest rate LRBAs would breach the borrowing rules. The answer was no, but the minutes do not record if the discussion included consideration of the Non-Arm’s Length Income (NALI) rules.

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Policy needed to fight short-termism in superannuation: FPA

FPA - superannuation short-termism, Financial System InquiryThe FPA have recommended an independent institution be established to “assess whether the superannuation system is meeting its objectives.”

This recommendation is made in the FPA’s second submission to the Financial System Inquiry, and comes in response to concerns about the lack of direction in superannuation policy, including short-termism.

“The role of superannuation as a pillar in Australia’s retirement income strategy requires a regular, apolitical system of review in order to build public confidence in superannuation as an independent institution”

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Force SMSFs to get financial advice before borrowing: AFA

AFA: Financial System Inquiry (FSI) - require financial advice for SMSF borrowing (LRBA)The Association of Financial Advisers (AFA) have recommended that before SMSFs are allowed to borrow they be forced to seek financial advice.

“It is our suggestion that SMSF’s should need to obtain advice from an appropriately licensed financial adviser before they can enter into a limited recourse borrowing arrangement within the fund.”

This recommendation was made by the AFA in a second-round submission to the Financial System Inquiry (FSI).

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CPA calls for lifetime limit on superannuation lump sums

CPA limit superannuation lump sums, Financial System InquiryCPA Australia has called for a lifetime limit on superannuation lump sums, among other recommendations in a second-round submission to the Financial System Inquiry.

Limit superannuation lump sums

CPA said in the submission that people need to be encouraged to take income streams in retirement instead of lump sums. However CPA does not argue for prohibiting lump sums, pointing out that lump sums can be useful during retirement.

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Spike in LRBAs a result of ATO change to statistics

Changes to how the ATO reports statistics for SMSF Limited Recourse Borrowing Arrangements has resulted in a dramatic increase in the 2013/14 figures. However this really reflects a underlying trend, instead of a actual spike in LRBAs.

These statistics are contained in the ATO Self-managed super fund statistical report – June 2014, which includes details of the June 2014 quarter, along with new details of the 2012/13 financial year.

Changes to reporting of LRBAs

In the June 2014 statistics the ATO has made changes to the reporting of Limited Recourse Borrowing Arrangements (LRBAs), resulting in the marked jump as seen in the graph below. This means that the statistics going forward will be more reliable, but longer term comparisons are not accurate. The changes resulted in a revision to earlier figures, raising the LRBAs from “$2.6 billion in 2013 to $8.3 billion,” according to the ATO.

SMSF Limited Recourse Borrowing Arrangements LRBAs 2009-2014

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Place limits on SMSF borrowing, says Rice Warner

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)

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SMSF LRBAs should be a financial product, says Cavendish

Cavendish - Financial System Inquiry (FSI) - SMSF borrowingCavendish, the SMSF administrator, has argued for a number of changes to LRBAs rather than a ban on SMSF borrowing, in a submission to the Financial System Inquiry.

SMSF borrowing

Cavendish draws a distinction between “traditional style” borrowings and the limited recourse borrowing arrangements (LRBAs) of SMSFs. “These differences mean the level of systemic risk posed by direct SMSF leverage is not the same as the level of systemic risk posed by direct leverage outside of superannuation,” said Cavendish.

“Given the legislative restrictions imposed on LRBAs and the conservative lending practices of the major financial institutions, we don’t believe the systemic risk posed by leveraged investments outside of superannuation is comparable to the systemic risk posed by LRBAs,” said Cavendish.

Read More »SMSF LRBAs should be a financial product, says Cavendish