Speaking to SMSF Adviser, Mr Dunn acknowledged the merit in the FSI’s argument against leverage in super, however he pointed to the opportunities limited recourse borrowing arrangements (LRBAs) pose for small to medium-sized businesses through tax concessions.
“It is a fantastic strategy for SME clients to look at LRBA arrangements to grow [their] business, to get involved with the ongoing improvement of the business and the success of them financially,” he said.
Similarly, director of wealth management at mid-tier firm Pitcher Partners David Lane said while limiting borrowing in super is a step towards improving stability in the super system, it could have unintended consequences on small business owners.
“Countless small business owners utilise the LRBA rules to own their business premises. With a blanket ban on borrowing within super, there may be a negative impact on small business around the country,” he said.
In addition, LRBAs have rarely enjoyed a “period of stability” since they were permitted in super seven years ago, Mr Dunn said.
“The former government had two opportunities to remedy the ‘property spruiking’ by making s67A and 67B a financial product. We saw a recommended two-year review from [the] Cooper Review amount to nothing, and more changes to the law, and interpretations of the law than just about any piece of superannuation legislation,” Mr Dunn said.
“The notion of tax concessions on savings, not borrowed funds is a valid one, but in reality has the legislation ever really had an opportunity to play out for those that should have appropriately benefited? We may never know.”
The FSI’s recommendation to ban borrowing in superannuation, although only a recommendation, could potentially be the “final nail in the coffin” for LRBAs, Mr Dunn suggested.
“The 44 recommendations have now been released by Treasury for public consultation until 31 March 2015. I suspect the white flag by the super industry hasn’t been fully raised yet, but it would appear that a significant amount of work will be required for it to survive.”
KCA- [quote name=”Kca”]I also wonder about this concentration argument. Is it more prudent to hand over all your money to someone else who invests in multiple shares a far riskier asset class than residential property ( compare margin loan rates on shares with resiential property loan rates) or invest in one residential property you have chosen yourself?[/quote]
You are correct. One property is obviously more ‘risky’ than a portfolio of shares. The shares may be more ‘volatile’ due to intraday valuation compared to far less frequent valuation of property. You have succinctly pointed out the perils of concentration risk.
Alun it is curious how people have so much to say about the personal guarantees of LRBAs when if you contrast with property investment outside super the same guarantees are given and there is no 20 to 30% equity provided by the fund. The equity is DIRECTLY provided by the investors family home. IE everything is on the line straight up there is no line of defence like there is with a LRBA. But the critics of LRBAs are strangely unperturbed about this.
I also wonder about this concentration argument. Is it more prudent to hand over all your money to someone else who invests in multiple shares a far riskier asset class than residential property ( compare margin loan rates on shares with resiential property loan rates) or invest in one residential property you have chosen yourself?
The two primary systemic risks with LRBs as currently used is that many/most are not in fact real limited recourse borrowing because trustees (i.e. members) are providing personal guarantees outside the fund and the concentration risk. In stressed situations personal guarantees will and do cause inappropriate behaviour – specifically using fund assets to meet margins in order to prevent triggering the personal guarantees. LRBs can only be suitable for SMSFs if they are in fact recourse is entirely limited to the assets purchased with the loan.
The concentration risk is a sleeper with many funds having very high percentages of their gross asset exposure to a single asset in a single location.
The Brits have a 50% gearing limit of funds assets. Simpler would just be to have 50% LVR at point of borrowing/acquisition. This would be very safe. If Murray and others disagree he should be preventing super funds from buying shares in listed companies with similar gearing.
Disappointing that Murray seemed to see it in very binary terms either yes to borrowing or no to borrowing not some improved regime somewhere in the middle.
There is of course that usual paternalistic attitude from the big end of town that no matter how bad their own performance they have the chutzpah to say that average Aussies should not be allowed to invest their own money how they would like.
If borrowing caused any systematic risk in Australia in the GFC it was in the big listed property trust sector NOT Mums and Dads buying residential rental properties.
Melb Broker I agree. It always has been easier to give an out right ban rather than to sit down & work out a sensible comprise.
Simple insertion to deal with the risks to mum and dad investors via SMSF’s and to maintain the current arrangements for small-medium business operations is to exempt business real property borrowing from any proposed change.
LRBA’s have their place in a well managed, diversified SMSF portfolio. Perhaps restricting a LRBA to a maximum percentage of the portfolio value of an SMSF would reduce the level of risk. Any financial adviser or accountant that advocates SMSF assets being concentrated in one or two assets/classes may not be acting in the best interests of the clients.