In an interim FSI report handed down on Tuesday, the panel made the observation that, if allowed to continue, growth in direct leverage by superannuation funds may create vulnerabilities for the superannuation and financial systems.
“The general lack of leverage in the superannuation system is a major strength of the financial system. Although direct leverage in superannuation is small, the current ability to borrow directly may, over time, erode this strength and create new risks to the financial system,” the report stated.
Speaking to SMSF Adviser, the SMSF Professionals’ Association of Australia’s Jordan George explained the policy option the FSI is exploring would mean diverting to the pre-2007 position, when limited recourse borrowing arrangements in SMSFs were not allowed.
Mr George noted that the chair of the FSI, former CBA boss David Murray, acknowledged some of the options put forward in the interim report were “quite radical in their nature.”
“Reversing the current position on super fund borrowing is one of those that you would say is quite a significant change,” Mr George said.
“They need information, they need people to provide them with the facts, and their views on how it’s functioning in the sector, and that’s what SPAA’s role in this review will be,” he added.
However, Mr George suggested making LRBAs a licensed financial product would reduce any potential risk the arrangements pose to the sector.
“That would limit the advice on LRBAs to be only given by a licensed financial advisers, because we think the real risk that is around LRBAs is in the spruiking of them to people who [possibly shouldn’t] be in the position to use them,” Mr George said.
“There are some issues that we know of in the fringes of the sector, where LRBAs are being promoted inappropriately, and we believe that making them a licensed financial product would give the regulators more teeth to tackle the problem.”
What I can gather from this is that banks who are hiding behind financial planning groups are once again creating rules that suits them, not to people who are trying to secure their future and retirement, and get away from the sharks that are constantly taking people’s hard working savings away, and living them on the street at the latest decades of life. Banks can’t comprehend the fact that many trustees are much better educated and skilled than 80% of the so called financial planners who are advising them on how to manage their funds, because the Government under the pressure of big four banks is just doing what suits them.
[quote name=”KCA”]This is exactly what I feared. Because there are some rogues out there the response will be ban LRBAs totally rather than reform them to something more conservative. Obvious thing is to mandate conservative LVR’s say 65% on residential and 60% on commercial. Pull them back to something that makes it highly likely they are cash flow positive.
If off-the-plan is where the real roguish behaviour sits then perhaps it has to be reformed so LRBA’s can only be for truly established property.[/quote]
Agree wholeheartedly. How is it that the rules don’t allow SMSF’s to borrow to “improve” a property but they can borrow to invest in a property that doesn’t yet exist?
Such a step would get rid of the spruikers and associated commission grabbers.
This is exactly what I feared. Because there are some rogues out there the response will be ban LRBAs totally rather than reform them to something more conservative. Obvious thing is to mandate conservative LVR’s say 65% on residential and 60% on commercial. Pull them back to something that makes it highly likely they are cash flow positive.
If off-the-plan is where the real roguish behaviour sits then perhaps it has to be reformed so LRBA’s can only be for truly established property.
Al lof it is nonsense –
Banks sceen the lending
Banks will not lend more than $200k
Banks wont to stretch people out over 30 yrs
SMSF are a great vehicle to freely chose to invest in property and not all in shares.
Share market overprices with more money chasing less holdins.
Keith I do not agree with your comment that negative gearing in super funds is distorting the property market. It is perhaps a myth and the numbers do not support this argument – refer to SMSF statistics published by the ATO for factual information regarding the level of gearing into residential property.
Granted there are possible issues with property spruikers etc, however LRBA has been an excellent tool for many of my clients to legitimately maximise retirement savings / reduce tax and utilise capital for maximum effect considering their whole circumstances. The potential benefits are to great to ignore.
It would be interesting to know just at whom the SMSF Professionals Association of Australias Jordan George is directing his comment that “…we think the real risk that is around LRBAs is in the spruiking of them to people who [possibly shouldnt] be in the position to use them.
As a CA in public practice, the scenarios we have seen repeatedly is unfortunately that the advice to go into LRBAs has most often been given by financial advisers who seemingly have little understanding of the consequences or potential consequences on the client.
They see it as a means of boosting the amount of funds under management, and little else.
I think we need to be realistic about what the Superannuation System is for and what Governments can afford. Negative gearing in Super Funds is distorting the home property market, and is only done by the larger funds. Given the 15% tax deductibility, I really doubt whether negative gearing can be justified.
As both an accountant & Fin Planner , i believe this type of advice should been only provided by a accredited SMSF specialist. My other concern is the bare trust arrangement, the SMSF should be allowed to borrow in it own right with this unnecessary expensive complicated structures it just add cost with out in real protection. Most importantly make it illegal for property Sharks to give advice on property in SMSF, Make it a legal requirement to disclose all commission/kick backs received.
Good to see the report at least considering winding back SMSF’s gearing directly. I think SMSF’s shouldn’t be allowed to enter into debt contracts at all, LRBA’s or any other type. The core attribute of super is supposed to be be the accumulation of retirement savings, and I consider direct gearing of returns with SMSF’s to be inconsistent with this . The gearing within listed companies and REIT’s , the availability of other geared assets via AMFS as well as the expansion of the range of ETF’s offers sufficient opportunities to magnify returns, both positively and negatively. These opportunities avoid the additional layer of complexities at a SMSF level of LRBA compliance,on-going review and cost of borrowed funds.
Seriously – LRBA’s a licensed financial product? So no-one can give advice on how it works or the dangers associated with it they have a financial planning license? IMO it sounds like another attempt to carve money out of the SMSF industry.
The problem is not only with the LRBA structure – it is people buying expensive new properties that are the only significant asset of the fund and drains all the income for the next 10 years.
It is not only a loan issue, it is an asset issue. Unless we make all property purchases subject to advice from a fee charging financial planner as well, what is the point of making the loan process regulated but the actual purchase of the asset unregulated?
ohh that’d be right. Introduce a rule that lets people borrow within super; then spend the next 7 years warning all and sundry not to partake because it is too risky; then outright ban it; another whole load of grandfathering rules no doubt!
Firstly as a financial planner I believe we should not go back to the pre-2007 rules , however I like the idea of licensing LRBA as Financial product where advice can only be given by accredited advisors.
The major concern I have at the moment is that there are people out there promoting this concept only for the sole purpose of selling a property , ie property developers with their trained sales staff , real estate agents , and there I say it accountants and financial advisors/planners who are involved with property developers who are receiving commissions for the sale of these properties.