LRBA ban to hit small business owners, lender warns Labor
A commercial lender has warned Labor against a ban on limited recourse borrowing arrangements, with SMSF loans a vital debt instrument for many small business owners.
Commercial lender Thinktank has cautioned Labor to think carefully about its proposal to ban limited recourse borrowing arrangements (LRBAs) for SMSFs, particularly in relation to commercial property.
Labor announced in April 2017 that it would restore the general ban on direct borrowing by superannuation funds, as recommended by the 2014 Financial Systems Inquiry, as part of its plan for housing affordability.
Thinktank chief executive Jonathan Street said that, while there have been some issues in the residential LRBA area which was in genuine need of tighter regulation, LRBAs are an “important debt instrument that allow SMEs and self-employed owners the opportunity to dovetail their commercial and superannuation ambitions to very positive effect”.
“It’s worth noting that since December 2013, we have financed more than 300 commercial property-secured LRBAs, with that part of the loan book currently standing at $165 million,” Mr Street said.
“Importantly, we have had practically zero arrears history — only one loan has ever defaulted in the wake of a cyclone and that loan did not incur a loss, and 81 per cent are currently repaying principal and interest in alignment with their retirement targets.”
Mr Street said that LRBAs for commercial property have proven to be a “highly performing borrowing and wealth management option when in the hands of responsible, disciplined lenders and well-advised borrowers”.
The SMSF Association has also previously highlighted the importance of LRBAs for the purchase of commercial property.
“[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,” the association said in a submission.
“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.”
Despite some of the concerns raised about SMSF loans by the Council of Financial Regulators, Treasurer Josh Frydenberg has made it clear that the Liberal Party will not be banning LRBAs if elected.
While the report by the Council of Financial Regulators assessing LRBAs ultimately found that SMSFs were unlikely to pose systemic risk to the financial system, the regulators’ preferred option was still to remove the exemption allowing LRBAs.
The report outlined some concerning trends with SMSF lending including changing market conditions and the rise of one-stop shops.