LRBA criticism overblown
The idea that limited recourse borrowing through SMSFs is contributing to speculative residential property investment is overblown, given that a significant proportion of LRBAs is used to fund the acquisition of business premises by the SMSF member, according to a commercial property lender.
Thinktank head of research Per Amundsen said recent regulatory scrutiny of LRBAs by the Council of Financial Regulators had concluded that they did not pose any systemic risk to the super system, despite calling for a ban on the structure and on the use of personal guarantees to support LRBAs.
“The fact is that real property investment represents only a relatively small proportion of total SMSF assets — 14.3 per cent as at March 2019 — compared with 56.7 per cent for cash, deposits and listed shares and trusts,” he said.
Moreover, Mr Amundsen said LRBAs were commonly used as an efficient way of funding and retirement planning for small businesses, and that a deeper dive into the LRBA statistics bore out of this trend.
“Real property investment [in SMSFs] is broken down to 4.9 per cent residential and 9.4 per cent non-residential. In the February CFR report, non-residential real property made up 46 per cent of that supported by LRBAs and is known as ‘business real property’ when used ‘wholly and exclusively’ for business purposes,” he said.
“It’s recognised that owner-occupied business premises make up a large part of this type of funding and that SIS Act regulations were specifically designed to allow for them. The benefits this offers to SME operators in planning and providing for their retirement cannot be questioned.”
Mr Amundsen said while LRBAs did not present a significant risk to the sector, recent moves to clean up dodgy operators in the SMSF property sector were welcomed.
“The statistics published by the regulator continue to show that LRBAs remain at a level that is nowhere near problematic for SMSFs and that the real problems identified can and should be effectively dealt with through regulation and enforcement to eliminate any identified abuses,” he said.
“The ATO’s efforts with respect to investment strategies and the late submission of annual returns is a great start to this, as are ASIC’s enforcement actions in recognition of failings by licensed advisers and others who owe a duty of care to trustees and members.”
