Late last week, former prime minister Paul Keating suggested there should be limits on leveraging in SMSFs in light of the surge in Australia’s housing prices, particularly in capital city markets such as Sydney.
“If I was treasurer today, I would be looking very hard at the whole entitlement or availability of debt to SMSFs,” he said. “They have gearing available to them and, of course, many of them are taking the option of buying residential property.”
Townsends Business & Corporate Lawyers principal Peter Townsend told SMSF Adviser that Mr Keating should note the facts concerning SMSF borrowing, such as that the vast majority of property gearing in SMSFs is in commercial property, not residential.
Mr Townsend also pointed to comments by AMP Capital’s chief economist, Shane Oliver, who said recently that gearing in SMSFs currently plays a relatively small role in Australia’s heated property market.
“The sector is being hammered by both sides of the political aisle because both sides of the political aisle support their own version of an APRA fund,” Mr Townsend said.
“APRA funds are leaking members to the self-managed sector [and] trying to find ways to trim the wings of SMSFs. They’re doing this through a government inquiry headed by a former banker, who’s well and truly the big end of town,” he said.
“It’s all on the basis of political agenda,” he added.
Mr Townsend called on representatives in the SMSF sector to make a stand against inaccurate representations of SMSF borrowing, fearing that the prohibition on borrowing will otherwise be restored.
“If we don’t stand up as a group, then borrowing will be banned and I’m disturbed by the amount of people who accept it as a fait accompli. My view is it shouldn’t be accepted as a fait accompli, we should stand up against it,” Mr Townsend said.
Well done Peter. I could not agree more. It is often the case that professionals in the SMSF industry are not given the oportunity to portray the very good things that SMSF’s provide, in the very vast majority of cases. We just get on with quietly doing it well. Done correctly borrowing, with limited recourse to any other fund asset, is a powerful and more effective retirement tool than borrowing in your own name. More secure, less other asset risk, because of the limited recourse nature and in a vehicle that is specifically designed for retirement purposes. The one sided views from some industry groups is nothing short of self interest.
Actually I rather like Mr Keating and we should be forever grateful to him for ending the double taxation of dividends (which was meant to be a temporary wartime measure) and over-ruling Treasury’s mad idea (often revived) of taxing trusts as companies. He was a very good Minister to deal with and brought intellectual engagement to any subject.
For example, his recent withering attack on the bogus Treasury “tax expenditure” figures for superannuation was excellent.
I myself would not ban strictly limited recourse borrowing by superfunds but I personally do not see much benefit in borrowing for property, especially residential property, at such low yields as are now prevalent.
Wholeheartedly agree. The hard data will show that residential LRBA’s are an insignificant proportion of super borrowings. The hard data if also collected would show the percentage of LRBA’s the run into default as being well below non super borrowing.
If LRBA’s are to be stopped then it should only be for residential property, we should also look at geared managed funds because they must be dangerous too if all super borrowing is apparently bad.
Probably look at the big banks and their hedged products and CFD’s while we are at it, never seen a SMSF make money on those either.
I think Small Business owners and their advisers must step up and fight for the continuance of LRBAs. Small Business Owners were the first nearly 3 decades ago to adopt the early form of SMSFs and they have always understood the that their business was their super but that using a SMSF they could get the best of both worlds and seek a little more safety for their assets while retirement planning. They are the sector that drives this nation and time and time again they are hurt by governments bringing in legislation to address other concerns but they are caught up as Collateral damage. I am fine with LVR limits or some more regulations but don’t throw the baby out with the bath water again!