The federal government’s decision to ban new limited recourse borrowing arrangements (LRBA) used for the purchase of residential property marks one of the most significant changes to SMSF investment rules in almost two decades.
The measure emerged as part of a political agreement between Labor and the Greens to secure support for broader tax reforms. Existing arrangements will be grandfathered, but new borrowing by SMSFs to acquire residential property will effectively cease. Commercial or business real property borrowing arrangements remain available.
The Greens argued the change was necessary to prevent SMSFs becoming a vehicle for increased property investment following broader tax reforms. Their concern was concessional superannuation arrangements could encourage greater demand for residential property and further disadvantage aspiring homebuyers.
To be fair, housing affordability remains one of Australia’s most pressing economic and social challenges and should be taken seriously. There is also a legitimate policy debate about whether borrowing should exist at all inside a retirement savings system that normally has a specific ban on borrowing. Borrowing magnifies returns when investments perform well, but it also magnifies losses when they do not. LRBAs operating as a limited exception to the borrowing prohibition was something that arose out of clarifying the legally grey area of instalment warrants and was not intended to be the rule.
However, acknowledging those concerns does not necessarily mean the policy response is well targeted.
One issue often overlooked in public debate is the relatively small role SMSF borrowing plays in the broader housing market. LRBAs account for less than 1 per cent of total residential property borrowing and less than 0.5 per cent of new residential borrowing each year. Even if every new residential LRBA disappears overnight, the effect on overall housing demand is likely to be modest.
This creates an obvious question: If an objective is to materially improve housing affordability, is this measure directed at a sufficiently large source of demand to make a meaningful difference?
Many economists argue Australia’s housing affordability problems stem primarily from persistent supply shortages rather than SMSF activity. Indeed, if policymakers believed SMSF borrowing was distorting markets, a more targeted approach might have been considered.
For example, borrowing could have been restricted to newly constructed housing, thereby supporting additional supply while limiting competition for existing homes. Instead, the chosen approach removes the borrowing mechanism altogether for residential property without creating any obvious incentive for additional housing construction.
The Greens’ broader concern regarding property promotion and speculative behaviour also warrants closer examination. There have been instances where consumers have been encouraged into SMSF property strategies through aggressive marketing, lead generation arrangements and high-pressure sales tactics. These practices can result in individuals establishing SMSFs or undertaking complex borrowing strategies without fully appreciating the risks involved.
Yet if poor conduct is the problem, banning borrowing may address the symptom rather than the cause.
Consumer harm often begins well before a property is purchased. It can arise when unregulated lead generators steer consumers toward particular products, advisers or investment strategies without being subject to the same obligations that apply to licensed financial advisers. Targeting upstream promoters, improving oversight of promotional activity and strengthening enforcement against misconduct would directly address the behaviour causing harm, rather than reactive measures such as outright bans.
As with similar issues that were highlighted as part of the Shield and First Guardian collapses, CPA Australia and others have argued policymakers should focus on the source of investor losses and misconduct rather than the type of superannuation vehicle through which investors happened to participate.
LRBA investment is already heavily regulated and this ensures a large number of the risks normally associated with borrowing to invest are reduced to manageable levels consistent with the expectations around superannuation as a savings vehicle. That said, where evidence suggests these arrangements could be changed to improve protections, one would expect modifications, rather than outright cancellation, would be a more appropriate reaction.
Good policy should target the source of a problem as precisely as possible. The new SMSF borrowing restrictions may prove politically popular and administratively simple, but there remains a legitimate question as to whether they are aimed at the right issue. Housing affordability will ultimately be determined by the balance between supply and demand. Investor protection will depend upon the effectiveness of regulatory oversight and the integrity of financial markets.
On both fronts, banning SMSF borrowing to buy residential property risks being remembered as a solution to problems located somewhere else entirely.
