ASIC has expressed its concern over the latest reported level of limited recourse borrowing arrangements (LRBA) employed by SMSFs due to the risk involved with these strategies.
“In September the ATO (Australian Taxation Office) released its statistical SMSF report for the June 2014 quarter. The report estimates that assets held under limited recourse borrowing arrangements by SMSFs have grown to $8.7 billion as at June 2014,” ASIC financial advisers senior executive leader Joanna Bird said during a presentation to the SMSF Professionals’ Association of Australia Sydney Chapter recently.
“I know that compared to the portion of assets held by SMSFs it’s not large, but that is actually a lot of investors’ superannuation in a reasonably high-risk structure.
“ASIC is concerned about limited recourse borrowing arrangements where the leverage is promoted without adequate explanation of the risk to the trustees and without sufficient regard to the needs, objectives and risk appetite of the individual investors.”
Bird said the corporate regulator’s work on SMSFs had unveiled an increase in the use of leverage in situations where the strategy might not have been appropriate for the trustees involved.
While the ASIC had no jurisdiction over what the individual trustees decided to do, its focus would be on the gatekeepers to make sure the proper recommendations were made to those individuals regarding LRBAs, she said.
“The gatekeepers, the advice providers, should set out the benefits and risks associated with leveraging,” she said.
“And they need to make sure that the strategy the SMSF takes is appropriate for the investor’s circumstances.”
Apart from its concerns over the appropriateness of LRBAs for some SMSF trustees, she said ASIC was also worried planners offering gearing advice might be breaking the law.
“It’s so important to remember if advisers are discussing borrowing through the SMSF, they may actually require an Australian credit licence,” she said.
“So, for example, if you recommend that an SMSF apply for a particular loan for a particular credit provider to invest in residential property, it’s likely you will need an Australian credit licence.”