The Financial System Inquiry (FSI) is done and dusted and we now await the industry consultation process to see which of the panel’s recommendations are adopted.
For SMSFs the final report could possibly be seen as a bit of a double-edged sword.
On the one hand, the sector was basically given a clean bill of health, with no alarming areas of concern either highlighted or targeted as needing drastic remedial action. On the other hand, what has been described as the nuclear option by some industry experts, a total ban on borrowing within superannuation has been recommended.
While the latter is yet another disappointing development in the regulation of SMSFs, it was not really a surprise. It’s disappointing because yet again we’ve seen a panel examining the sector get totally swept up in what I consider some recent hysteria surrounding the use of limited recourse borrowing arrangements (LRBA) in SMSFs. David Murray’s panel said it was concerned SMSF members would sell off some of their other superannuation assets to fund an LRBA, especially where a personal guarantee was involved, effectively eroding the limited nature of borrowing.Further, it said this practice would potentially diminish the level of diversification of SMSF portfolios. While everyone is entitled to their opinion, my question to the FSI panellists would be when have you ever seen this happen? In fact, have there even been cases where the fund trustees have not been able to service the loan? If there have, can we see some evidence you might have to support these claims and these concerns?
The growth in the number of SMSFs using an LRBA to purchase an asset was another reason the FSI panel cited for bringing down the nuclear option. It said: “Over the past five years, the amount of funds borrowed using LRBAs increased almost 18 times, from $497 million in June 2009 to $8.7 billion in June 2014.” No one is denying this trend, but some context needs to be framed around it. The statistics the FSI quoted come from the sector regulator – the ATO. But here’s the thing, the ATO itself does not think this increase is of any concern. This is because the figures actually reflect only 2.7 per cent of SMSFs have an LRBA in place and only 1.7 per cent of SMSF assets are held under an LRBA.
It prompted then ATO assistant deputy commissioner of superannuation Stuart Forsyth to declare in September last year: “Less than 2 per cent of SMSF assets are under an LRBA. The sky’s not falling in – it’s 1.7 per cent of assets held by SMSFs.” If the regulator of the sector is not concerned, why should anyone else be? If the panellists on this inquiry and any subsequent ones are unwilling to trust the judgment of the ATO, which is eating, sleeping and breathing SMSFs, what’s the point of these exercises? In all reality though, this latest recommendation smells a lot like the proposed ban on investing in collectables or personal assets the Stronger Super panel handed down. That recommendation also addressed an area with miniscule SMSF significance and was similarly considered way too drastic.
In the end, the ability to invest in collectables was retained, but more stringent rules around the practice were implemented. I suspect we’ll see a similar outcome with LRBAs.
