Ban on LRBAs to spur ‘indirect borrowing strategies’
Restrictions on LRBAs could see the emergence of indirect borrowing strategies and schemes which may expose SMSF trustees to “unscrupulous advice”, warns the SMSF Association.
In a submission to Treasury for the Council of Financial Regulators’ review of LRBAs, the SMSF Association said it does not consider LRBAs to be a systemic risk in the SMSF sector or the broader superannuation sector.
While the submission acknowledged that property spruikers or one-stop property shops who inappropriately target SMSFs remain a concern, limiting the use of personal guarantees and increasing SMSF education it said could help protect trustees from entering risky borrowings with high loan to value ratios.
Limiting the use of personal guarantees, it said, would help ensure that the SMSF is able to adequately service the loan based on the financial circumstances of the SMSF members within the superannuation system, rather than looking at circumstances and assets outside superannuation.
“Furthermore, any default on an LRBA, without a personal guarantee, would ensure that other assets are not available as security to the lenders. For example, the risk to silent partners that their personal property is used as guarantee for an LRBA would no longer exist,” it said.
The submission also stated that if LRBAs are restricted, indirect borrowing strategies and schemes may be developed to fund domestic and commercial property acquisitions.
“These schemes which may include unit trust structures would have the potential to provide unscrupulous advice to SMSF trustees, regardless of a direct restriction on LRBAs,” it stated.
“This is an important consideration for any policy change. Indirect borrowing through unit trusts is already common in APRA regulated superannuation funds, especially where property investment is conducted through geared property unit trusts but also via geared investments in equities and other asset classes.”
From a competition perspective, the submission said it would be detrimental to restrict borrowing within the SMSF sector while allowing extensive indirect borrowing in the APRA-regulated superannuation sector to continue.
It also highlighted the importance of LRBAs for the purchase of commercial property for small business owners.
“[This] can be an extremely important retirement savings strategy for small business owners who accumulate most of their retirement nest-egg through their small business,” it said.
“Any loss to the flexibility of business real property CGT exemptions through the funding of LRBAs, which allows small business owners the opportunity to work on premises owned by their SMSF, would significantly impact the ability for those individuals to save for retirement.”
Small business operators it said tend to reinvest in their business rather than contribute to superannuation.
“Business real property LRBAs provide certainty that rental income is paid, access to superannuation taxation benefits for many self-employed persons and more flexibility in ownership and succession planning.”