In its pre-Budget submission, the Australian Institute of Superannuation Trustees stated that borrowing through limited recourse borrowing arrangements creates the potential for systemic risk and should be addressed in the Budget before the risk is realised.
In its submission, AIST referred to the recommendation from the Financial System Inquiry in 2015 that called for the exemption to the general prohibition on direct borrowing for limited recourse borrowing arrangements by superannuation funds to be removed.
“The FSI pointed out that risks are magnified across the financial system by leverage. Types of financial risk impacted by leverage include market risk, credit risk, manager risk and liquidity risk,” the submission stated.
“These have increased at both an investor level, as well as a macroeconomic level. The interconnectedness of our financial system means that should failure in the form of defaults by borrowers become widespread, the spill-over effect may be unable to be contained by ordinary provisioning.”
The submission noted that the government did not proceed with the FSI’s recommendation for a ban, choosing instead to tighten some of the underlying rules, and commissioning the Council of Financial Regulators (CFR) and the Australian Tax Office (ATO) to monitor leverage and risk in the superannuation system and report back to Government after three years.
“The 2019 CFR/ATO report and the 2018 Productivity Commission’s ‘Superannuation: Assessing Efficiency and Competitiveness’ report both noted that the relatively small number of super funds using LRBAs means that such borrowing did not pose a material systemic risk at that time. A closer reading of both reports reveals serious potential concerns about the use of LRBAs,” it said.
“The Productivity Commission concluded that continued growth, coupled with any gross underperformance of the LRBA being underwritten by the age pension could generate systemic risk in the future.”
AIST stated that the conclusions in the report by the Council of Financial Regulators and ATO reveal the regulators “had serious concerns”.
“These concerns remain and should be addressed,” the submission stated.
The submission also stated that evidence presented to the Royal Commission along with ASIC Report 575 released in 2018 had “raised concerns with the number of funds that entered into a LRBA because of poor or conflicted advice”.
“The regulators agree that the presence of leverage in SMSFs through LRBAs has significant implications for the security of individuals’ retirement savings,” said AIST.
Aside from the preferred option of removing the exception to allow SMSFs access to LRBAs, AIST said there are other potential policy interventions that the government could look at to address these concerns.
“These range from truly limiting the recourse of the lender over the asset by prohibiting the use of personal guarantees, to reducing high leverage and concentration risk within the fund by creating prudential responsibilities for the regulator,” the submission stated.
Yawn! had no idea who the AIST were before this article…
its is an absolute disgrace that SMSFs are still being persecuted in this manner due to whatever agenda the AIST may have. It is correct that the risk increases when you borrow, but this is exactly what the financial planners advise their clients to do to ensure they have enough funds to retire. The long term nature of super and property go hand in hand if executed correctly! if there are advisors out there promoting LRBAs when they are not appropriate for their client, then punish the advisors not the whole industry.
i do not recall any major failures in the SMSF space which have been exposed to LRBAs. AIST please provide some real life examples of the issues you refer to instead of the rubbish you have submitted
Personally, I don’t think residential real estate should be allowed as an investment asset within SMSFs, simply because there is too much conflicted advice occurring.
In many cases, this type of asset is detrimental to the client, does not provide diversification and panders to peoples’ Investment Bias towards property.
What really gets on my nerve though is that I know of at least one Property Group making the rounds which is only concerned about providing for their own wealth and guess who pays for that? (No, it’s not the developer) Totally shameful.
A good Commercial Property for a business person’s own business… great strategy, but residential rubbish? Please, somebody grow a brain!!
it is the trustee’s decision how he the superfund should invest and not yours,
Why is commercial such a great strategy?? I know that I would’ve been much better off if I’d bought one of the residential properties we have recommended for our clients over the past 6-8 years instead of the commercial office space I bought. Residential is easier to lease & has a much greater market of buyers when it comes time to sell.
As long as it’s done as one part of an overall plan, than I think resi property in super is a great investment for the right clients.
Yeh that residential property on NSW Sth Coast with an LRBA that we purchased 5.5 yrs ago has been a terrible investment, was only up 90% over 5yrs. Sure it will back off some now.
“Residential rubbish”, personally your comments are rubbish : – )
The whole system needs to be reviewed and go back to what it was intended to do. Provide for retirement. Not provide tax benefits.
How is buying a long term property asset not providing for your long term retirement needs?
Agree with all of the above. Would AIST please point out the systemic risk here. If AIST wants to limit leveraged assets in SMSFs then that would rule our most ASX listed companies who use debt their capital structure. Go figure.
Labor declared the super wars over. Clearly industry super is still fighting. An early test to see if Labor’s actions match its words.
If industry super was really concerned about member benefits it would return some of the >$1b in ISH. And should reimburse members for all the money that’s been taken from their retirement savings and ended up supporting Labor election campaigns.
I totally agree. It is not the LRBA that poses the risk, it is the people that promote them to trustees who should not enter these arrangements because of their lack of knowledge or insufficient
capital. Rather than ban the LRBA, regulate the promoters.
ridiculous Article. Anything is a risk. A well planned strategy makes an LRBA a very good viable option for many business owners who can utilise a commercial property through their SMSF.
Well said Michael.
I completely agree that LRBA’s should be closed off. Its worthwhile noting however that the SMSF industry never asked for LRBA’s in the first place. At that time the issue/problem was a certain banks Installment Warrants and whether or not they complied with the SIS Act. The solution provided to everybody’s surprise was LRBA’s.
Yes I think you will find that the LNP wanted to flog off more of Telstra, via T3.
Given Telstra 1 1997 & Telstra 2 1999 were both sold to many 1,000’s of SMSF’s via Instalment Warrants.
And yes a certain bank then used the same Instalment Warrants the Government had used to sell other shares via same structures to more SMSF’s.
In 2006 with the LNP busting to sell more Telstra via T3, APRA & ATO ruled that Instalment Warrant were in fact a BORROWING and Borrowing being illegal under SISAct.
So the Govt changed the rules and allowed SMSF Borrowings via Instalment Warrants / limited recourse.
This similar structure was then used for SMSF and LRBA’s over Investment property arrived.
So Labor told everyone they had dumped policies on Franking Credits and LRBA’s.
But wait now Labor & it’s Union buddies are actually trying to kill Franking Credit Refunds and now LRBA’s too.
Unpopular at election time but not long until they have come back into Labor’s Real Agenda.
Politicians / Political parties must be held to promises they make. Yeh sure dream on people.
It ain’t gonna happen.
Do you know why?
Because Labor needs SMSFs investment to boost housing supply. Their large industry super fund buddies aren’t interested, and Chalmers knows that SMSFs can fill the gap.
Dare I say NRAS v2 ❗
Dear AIST,
Lets ban all borrowing then, why just target one particular structure? Lets ban people from borrowing to purchase a house….If we banned all borrowing for anything we might have zero risk!
No vested interests on display here. Same old tired arguments from the people who don’t want smsf to exist at all.
Goes hand in glove with setting benefit limits on members with balances large enough not to be in the funds they administer.
Pure conflict of interest on display here. Shamelessly so.