In its response to the Financial System Inquiry interim report, made public on Friday, SMSFOA said while “there is no evidence of widespread abuse of gearing ... there has been some concerns that some parties have been ill-advisedly establishing SMSF with high levels of gearing without the proper understanding of the beneficiaries".
High levels of gearing could "create vulnerabilities for the superannuation and financial system", the submission said.
SMSFOA said superannuation is fundamentally a savings system and establishing an SMSF to hold one highly-geared asset is “unwise”.
“We do not believe it is appropriate for SMSFs to have high levels of gearing but we are also wary of Government mandating what SMSFs must and must not invest in,” the submission said.
“Government prescription as to what and how people can invest has not had a good history of success.”
SMSFOA continued that SMSF gearing is required by law to be “limited recourse”, not allowing a lender to recover losses from the general assets of the borrower.
“Apart from selling the secured asset to cover any loan default, the lender can’t chase the borrower to top up any remaining losses,” SMSFOA’s submission said.
“That can lead to systematic risks to the banking sector and that is why – at least in the case of SMSF lending against shares – loan providers typically embed additional protection mechanisms when they lend to SMSFs,” it said.
“Properly used, these protection mechanisms can actually reduce risk to investors.”