Superannuation is one area of the finance industry heavily prone to political and legislative risk, with SMSFs even more exposed due to the continual threat of rule changes applying only to the sector itself.
Admittedly, perhaps the perception of this risk for SMSFs is greater due to the continued criticism of the sector from the consumer press and other parts of the retirement savings industry driven by self-serving agendas.
In recent times, this type of attack has come in the form of accusations the sector has sole access to unfair tax concessions, is able to enjoy more benefit from the dividend imputation system than anyone else, and is investing in residential property to such an extent the market is overheated.
As I said have repeatedly, the biggest concern about the situation is having the people in positions of power in places like Canberra heeding the self-interested criticism and acting upon it when no action is actually necessary.
So when I heard what Assistant Treasurer Josh Frydenberg said about the Financial System Inquiry’s (FSI) recommendation to ban limited recourse borrowing arrangements (LRBA) in SMSFs during a speech at the Tax Institute a few weeks ago, I was very relieved.
Why relieved? Because I had finally witnessed someone in a position of ultimate influence indicate they’d be assessing calls for changes to the SMSF sector in a considered and rational manner. Moreover, Frydenberg took time to actually frame some context around the argument, enabling an approach that will differentiate speculation from reality.
Just to refresh our memories, David Murray’s FSI panel wants a ban on LRBAs because they introduce too much risk on several levels to people’s retirement savings.
In particular, the FSI expressed concerns LRBAs lead to greater portfolio risk as their use encourages individuals to purchase a single asset rather than a diversified range of investments. Murray’s panel also suggested this effect could be multi-layered as superannuants could find themselves in a situation where other retirement savings assets would have to be sold to service an LRBA.
While the first point raised by the FSI may be valid, the second concern is purely speculative as no evidence, anecdotal or otherwise, has been produced to show this scenario is occurring. Of course, the FSI panel would also be hoping banning LRBAs would eliminate the unscrupulous property spruikers from the SMSF arena as well.
The Assistant Treasurer responded by saying: “We have all heard unhappy stories of property spruikers providing inappropriate advice to people, encouraging them to start up SMSFs in order to gear up and buy a flash new apartment off the plan. Then the property price plummets or the rent dries up, and the member is left either wiping out their super balances by liquidating other assets, and possibly losing the family home they’ve offered up as a personal guarantee. There may also be liquidity issues when funds move into pension phase.
“Where this happens, it is clearly troubling. But these stories are very much the exception, not the rule. The available statistics on limited recourse borrowing arrangements, while not perfect, tell us that limited recourse borrowing arrangements remain a very small proportion of SMSF assets, and are more often invested in commercial property than in residential high-rises.”
Frydenberg strengthened his point with the statistic that only 0.07 per cent of Australian residential property was held by an SMSF through an LRBA in 2013. He made it clear the government would not be ignoring the risks presented by LRBAs, but would be dealing with the issue in a proportionate manner.
The whole sector can draw solace from these remarks as it would indicate future regulation and legislation involving SMSFs will be performed with some sense and sensibility and not as a knee-jerk reaction.
