RBA sounds alarm again on SMSF borrowing

In its monthly Stability Review, the Reserve Bank has again warned of the potential risks SMSF borrowing poses to Australia’s financial system.

In the review, released on Friday, the RBA noted that investment residential property by SMSFs continues to grow quickly.

Although the level of borrowing represents less than three per cent of total SMSF assets, the RBA noted the level of borrowing was recently revised to a significantly higher rate.

The June 2014 quarter estimates for assets held by SMSFs under LRBAs were revised from $9.3 billion to $15.1 billion by the ATO in late September.

“As noted in previous reviews, borrowing by SMSFs for property investment could, at the margin, introduce new vulnerabilities in the financial system because it provides a vehicle for potentially speculative property demand that did not exist in the past,” the RBA stated.

“This is one reason why the Reserve Bank, in its submissions to the Financial System Inquiry, recommended that borrowing by superannuation funds be restricted.”

Late last year, David Murray’s FSI recommended a removal of the exception to the general prohibition on direct borrowing for limited recourse borrowing arrangements by superannuation funds.

The government’s official response to this recommendation has yet to be heard, but former Assistant Treasurer Josh Frydenberg signalled in late August that the government may be willing to keep borrowing in super on the table.

“I do want to emphasise that we have been considering the issue carefully – we want to make sure the approach we adopt is proportionate to the risks that have been identified,” Mr Frydenberg said at the time.

“Leverage always carries risks – lenders recognise this in their loan-to-valuation requirements – and while we do not intend to ignore these risks, we need to make sure that response is proportionate to the problem that the FSI has identified,” he said.

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