David Murray’s Financial System Inquiry (FSI) has now handed down its report – one that thankfully did not contain any drastic recommendations regarding the SMSF sector.
About the only recommendation that relates directly to SMSFs is the proposal to ban the use of limited recourse borrowing arrangements (LRBA). The panel gave several reasons for suggesting this course of action, one of which was the increase in the value of SMSF assets acquired under an LRBA from $497 million in June 2009 to $1.8 billion in June 2014.
A second reason for wanting to scrap the use of LRBAs was the concern SMSF trustees might sell off other assets to service the borrowing, potentially lessening the level of diversification within the super fund’s investment portfolio while increasing the risk involved.
In addition, the report said LRBAs by nature could allow lenders to charge higher rates on those loans and incorporate personal guarantees, further raising the risk taken on by an SMSF.
Something to keep in mind is this measure is still only a recommendation, meaning more consultation needs to take place with the industry before it becomes law. To this end, most industry bodies are against the move, considering it completely unnecessary in light of the statistics on LRBAs currently available.
Moreover, the Australian Taxation Office itself did not regard the use of gearing as a problem, pointing out the figures meant only 2.7 per cent of SMSFs had an LRBA in place and only 1.7 per cent of the total assets held by SMSFs were under an LRBA.
So it would appear the relevant parties will be advising against any legislative change to the super borrowing rules.
When analysing this recommendation, it may be useful to refer back to the Stronger Super review and its treatment of the SMSF sector.
Like Murray’s panel, Jeremy Cooper also gave the SMSF sector a clean bill of health with one exception. Cooper was concerned about the ability of SMSFs to invest in collectables or personal-use assets and recommended banning the practice.
However, after consultation with the industry, SMSFs were allowed to continue investing in these types of assets, but with a stricter set of rules around storage and insurance.
It was widely speculated at the time the Stronger Super review only included this recommendation as it could not allow a perception that everything was perfect within the SMSF sector, so some corrective medicine had to be suggested.
In choosing the subject of collectables, one that like LRBAs provoked a passionate response from the wider community, the Cooper panel isolated one area that would affect less than 2 per cent of SMSFs. But still it would be seen as having done something to ‘improve’ the sector.
In the end, the original proposal was watered down and don’t be surprised if this scenario is repeated come the final outcome of the FSI.
There is already talk that rather than banning the use of LRBAs, stricter licensing regulations around the advice provided about these strategies and their implementation would be a better solution.
So there is no need to worry just yet when it comes to LRBAs as the final outcome could be a lot less severe than the original recommendation and may establish a more robust common-sense approach.''