The Council of Financial Regulators recently released its report on Leverage and Risk in the Superannuation System concluding that while limited recourse borrowing arrangements can represent a significant risk to some individuals’ retirement savings, SMSF borrowing does not pose a material risk to the super or broader financial systems.
SMSF Association chief executive John Maroney said that in 2019, the association’s response to the CFR was that an outright ban on LRBAs could be avoided by ‘mitigating’ risks to this SMSF asset class.
“What has occurred in the intervening three years reinforces our view that a ban on LRBAs would be overkill, with the report highlighting that SMSF borrowings remain a small percentage of total SMSF assets and, as such, pose little risk to financial stability while assisting many small businesses, in particular, meet their retirement income goals,” said Mr Maroney.
The association also noted that the report also challenges another criticism of LRBAs – their impact on property prices – by highlighted that they only comprise a small share of total housing credit.
Mr Maroney said the ongoing viability of LRBAs is due, in no small part, to the integrity measures introduced in 2018, including changes to the total superannuation balance and non-arm’s length income rules.
“In our opinion these measures have greatly improved the system, helping ensure LRBAs are used responsibly,” he stated.
“That said, it is important for SMSF trustees considering an LRBA to get specialist advice as they can be complex arrangements which require carefully assessment of the risks, benefits and costs.”
The association said that one-stop property shops advocating LRBAs and providing unlicensed personal advice remain a concern though.
“We have long supported a crackdown on their activities and believe ASIC has done much to curtail their nefarious activities. But the fact they still operate highlights the need for the entire sector to remain vigilant to ensure this debt instrument remains available to the vast majority who use it responsibly.”
