From the Editor

From the editor: LRBAs here to stay

The uncertainty over what will happen to the regulations allowing gearing to be used to acquire assets within an SMSF has been hanging over the sector like a dark cloud ever since the David Murray’s Financial System Inquiry (FSI) recommended the practice be banned.

The FSI panel’s justification for suggesting the practice be outlawed was it introduced a level of risk that could eventually eradicate an individual’s retirement nest egg.

It was a recommendation that proved to be altogether unhelpful leaving SMSF members with a limited recourse borrowing arrangement (LRBA) in place wondering what would happen to their existing strategy if the rules changed.

It was also potentially counter-productive as it prompted advisers to tell people contemplating using an LRBA strategy to do so immediately before legislation to rule out the practice was brought in.

Had individuals panicked and heeded the above advice the FSI could have inadvertently actually increased the risk levels incorporated within an SMSF portfolio with more people putting them in place before they were gone forever.

Thankfully in its response to the Murray review the federal government chose this recommendation as the only one not to implement.

However it wasn’t as if the new Treasurer Scott Morrison and new Assistant Treasurer Kelly O’Dwyer did not properly heed the warnings of the risks involved with borrowing strategies the FSI went to pains to point out.

In making its decision not to scrap the use of gearing within super funds the government did agree to commission the Council of Financial Regulators and the ATO to closely monitor the situation and associated risks and report back to the government in three years’ time.

The outcome can only be seen as a win for SMSFs Australia-wide on several fronts.

The most obvious of these is the continued existence of a powerful strategy that when used appropriately can go a long way to ensuring the adequacy of an individual’s retirement savings.

For younger members of the workforce the use of an LRBA can allow them to make running their own super fund a viable exercise as it can significantly boost their asset balance by hundreds of thousands of dollars in one fell swoop.

All individuals can also benefit from the fact that when an SMSF asset is acquired under an LRBA it does not count toward the contributions caps.

But perhaps more importantly the decision goes a long way to maintaining the integrity of SMSFs themselves.

Countless surveys and industry research have shown a large number of trustees establish an SMSF for the amount of control it allows them to have over their retirement savings and the flexibility involved in managing the assets in the fund a variety of different ways.

Once this inherent characteristic of flexibility is eroded, even slightly, the operation of these types of super funds maybe changed forever as it could be seen as the first step towards a more prescribed structure – the one thing SMSFs strive not to be.

As said earlier the LRBA recommendation was the only one out of 44 that was abandoned and the government should be applauded for demonstrating a good understanding of what makes SMSFs and their trustees tick.

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