The SMSF Association has vigorously defended the ability for SMSFs to use limited recourse borrowing arrangements (LRBA) in response to the move from Greens politicians to have them banned as a condition of their support for the proposed Division 296 tax.
In his latest blog post, SMSF Association chief executive Peter Burgess said he could not believe the notion of banning LRBAs would be brought up as part of the parliamentary debate over the bill to introduce the tax on total super balances over $3 million.
“It’s our firm belief that LRBAs are again being used as a stalking horse for those who find the concept of people taking control of their own retirement savings via an SMSF an anathema. They believe superannuation is too complex, too risky for it to be left with individuals. The fact that the data conclusively shows, in terms of costs or investment returns, that SMSFs are a viable superannuation option for those who choose it is conveniently ignored,” Burgess noted.
Specifically, he refuted the Greens’ claims SMSFs were using LRBAs to acquire residential property and those strategies in turn were contributing adversely to the housing shortage Australians are currently facing.
“Based on the ATO’s annual statistics for 2021/22, SMSF investment in residential property, both directly and through LRBAs, stood at $76.9 billion. With CoreLogic valuing Australia’s residential market at $10.8 trillion, it means SMSFs hold about 0.7 per cent of the market. I’m no economist, but I fail to see how such a low level of investment is crowding out first-home buyers,” he noted.
He also rebutted statements from the Greens that the use of LRBAs is increasing at an alarming rate.
“At 30 June 2022, the value of SMSF borrowings were $22.6 billion, having peaked at $25.2 billion in 2019/20. Over the same period, the total value of assets (property and other investments) subject to an LRBA were $56.3 billion and $52.91 billion respectively,” he acknowledged.
“Although over the past 10 years there has been an upward trend of SMSFs adopting LRBAs, the proportion of SMSFs using LRBAs is showing signs of stabilising or slightly decreasing in recent years. Only 11 per cent of SMSFs have an LRBA and LRBA borrowings represent just 2.7 per cent of total assets for the sector.”
According to Burgess, LRBAs have an important and valuable role to play in the superannuation system.
“Around 42 per cent of assets held under LRBA borrowings are non-residential real property (ATO figures), helping small businesses and farms be more financially viable and helping secure their owners’ financial security in retirement,” he said.
“Like any debt instrument used sensibly (the maximum loan-to-value ratio for an LRBA from a specialist lender is normally around 80 per cent), they enhance people’s personal wealth. It’s not a long bow to draw to say many now in retirement are more financially secure because they used leverage – no different to the millions of Australians who borrow to buy their house.”
Further, he called for these gearing instruments to be assessed properly and not continually be used as a weapon to attack the sector.
“Since LRBAs become an investment tool in 2007, they have been mired in controversy, a convenient whipping boy for those with an axe to grind against SMSFs. Everyone is entitled to their opinion. I only wish they would base their arguments on fact, not fiction,” he said.
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