The ATO has revealed the level of risk it believes limited recourse borrowing arrangements (LRBAs) pose to the SMSF sector and its “surprise” at the Assistant Treasurer’s rule-out of a review into borrowing.
In spite of increased public scrutiny, LRBAs represent a “medium risk”, according to the ATO’s director for SMSF regulatory and income tax products, Nathan Burgess.
Speaking exclusively to the SMSF Academy’s Aaron Dunn in his SMSF Podcast Show, Mr Burgess said a lot of the speculation regarding LRBAs doesn’t match what the ATO is seeing “on the ground.”
While there has been growth in LRBA use amongst SMSFs, Mr Burgess indicated the increases are coming from a “very low base.”
“Yes it’s something we need to look at and something we have to keep watching over… we don’t think that there will be a failure of regulation of the industry,” Mr Burgess said.
Mr Burgess also told Mr Dunn despite perceptions that SMSF investors “stretch themselves” in relation to their borrowing capacity, average loan arrangements are relatively conservative.
“We work with financial institutions, we find that they are very conservative in this area as well, and that’s great… because that means that it’s unlikely that there will be a failure of this regime,” he added.
“I think it’s probably a good reflection on our financial institutions regime here… they don’t want a failure here either. I think it shows the maturity of the market, and sometimes I think that gets missed in the commentary.”
However, Mr Burgess said the ATO was caught by surprise that a review into LRBAs was ruled out by Senator Sinodinos late last month.
“We were getting ready to say on the evidence base, there doesn’t seem to be any underlying problem with this arrangement,” Mr Burgess said.
“What we’re actually seeing in the regime, there is no systemic failure at this point and that would’ve been our response.”
Speaking about the ATO’s agenda for the next 12 months, Mr Burgess said the ATO is monitoring trustees entering borrowing arrangements for overseas property purchasing.
The ATO will also be paying closer attention to promotional marketing materials that are misleading, Mr Burgess said, along with ASIC and other federal agencies.
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