SMSF Adviser reported early last month that the prudential regulator could target loans to low-balance SMSFs next, citing Thrive Investment Finance owner Samantha Bright.
“There’s a recommendation, and it was actually by the ATO, that people with less than $200,000 in their fund [should] not get a loan, and we’ve seen some of the lenders then adopt rapidly the $200,000 as their minimum fund balance in line with that,” Ms Bright said.
Ms Bright said she would not be surprised if, instead of being just a guideline and a recommendation, the $200,000 becomes a hard benchmark.
Townsends Business & Corporate Lawyers principal Peter Townsend said a policy along these lines would be a “very bad idea” and should be strongly resisted by the SMSF sector.
“What is it with $200,000? Did Moses come down from the mountain with that number scratched on the 10 commandments as a postscript? Or is it a devil’s number? Did the witches in Macbeth mention the number somewhere while whipping up a quick spell?” Mr Townsend told SMSF Adviser.
“Where is the reasoned evidence, argument and discussion about a policy such as this and why is this particular SMSF strategy to be limited when others are not?”
Mr Townsend acknowledged the costs of running an SMSF, however, he suggested the importance of that is over-stated in this context.
“It’s not the cost of running an SMSF that’s the important thing, it’s the returns. Would you rather pay 1.8 per cent of the fund’s value in annual running costs and earn 8 per cent on the money in the fund or pay 3 per cent of the value on costs and earn 15 per cent?” he said.
“And I don’t want to hear anything about, ‘Well, you can’t guarantee the SMSF will earn that much or do better than the average public offer fund’. No I can’t. But I don’t have to. You see, our system permits a person to operate their own SMSF regardless of the return they can achieve and whether it is better or worse than the ‘big boys’.”
What the regulator misses with the minimum balance discussion is the compounding benefits that clients accrue by starting the fund and borrowing earlier. The compounded gains from years 20-40 from a property or shares are significantly more beneficial than the costs of running the fund in the early years.
Exactly Mark. There is also the benefits of having double or triple the asset value (by virtue of the borrowed funds) and the SMSF members receiving their returns on the gross assets of the fund. then there is the additional benefit of trustees/members being more engaged with their super than if they were in an industry or retail super fund. And if they are commencing a fund with a good adviser they will generally be better insured compared to their unadvised brethren in industry funds if they are unfortunate enough to suffer an injury, illness or premature death.
No amount of sensible submissions on this minimum balance caper seemed to dint the Regulators enthusiasm for the magic $200k number.
I think Peter maybe onto something with the Macbeth reference.
The drafters of this stuff certainly don’t seem interested in Practitioners views. They will listen to Professional lobbying because that seems ‘safer’ however the resultant “rules” usually fall short.
On the ground Advisors can generally articulate how things actually work in the real world (if there was an interest).
A client SMSF wants to buy an investment property. With stamp duty and the legal fee the overall cost will be around $1 million. The fund will contribute $400,000. NAB and ANZ have told the client that they are no longer lending to SMSFs. Is this a co-incidence? This seems a neat way to achieve the same result vis a vis the $200,000 barrier. APRA just has to have a friendly word to the banks and, voila, $200,000 or whatever is the limit, no more borrowing by SMSFs!