The Financial System Inquiry (FSI) has indicated its preference for a total ban on the use of gearing inside superannuation funds, but this course of action is unnecessary and would lead to poor outcomes for the SMSF sector, according to an industry expert.
“I think it’s quite clear in my view that they have a belief they would like to take things back to where they were prior to 24 September 2007,” SMSF Academy managing director Aaron Dunn told last week’s 2014 FPA Professionals Congress in Adelaide.
Dunn said the FSI’s view was that there were enough opportunities for individuals to employ gearing in their investments outside of super without having to allow similar strategies within super.
“They’re quite clear in saying: ‘We don’t think this is a good thing. We’re backing up what previous reviews say and in our view we want to peel this back because we want to nip it in the bud before it gets out of control,’” he explained.
He said he was not convinced that was the best approach for the regulators to take when addressing the use of leverage in super.
“The concern that I would have here is [this appears to be] the nuclear option,” he said.
“So are they trying to get rid of it without fundamentally understanding the demographic that are using this and are benefiting from it?”
He said SMSF statistical data showed some people clearly were getting significant advantages from limited recourse borrowing arrangements (LRBA).
“We know that the largest component of limited recourse borrowing arrangements is not residential property, but is business real property. Close enough to half of all the arrangements that exist today are done with small business in Australia,” he said.
“It is a fantastic strategy for many of your SME (small to medium enterprise) clients to look at LRBAs to allow them to grow businesses and get involved with the ongoing improvement of their businesses and the success of them financially.”
He said he was hopeful improved SMSF information published by the Australian Taxation Office (ATO) would help dispel any myths associated with LRBAs to prevent the “nuclear option” from being implemented.
“I would like to hope limited recourse borrowing arrangements are here and here for a long time because they do serve a purpose for the right type of [SMSF] trustee,” he said.
“But I would think if it is to survive, we’re going to see further change and I think you need to be on top of where this is moving and fundamentally understand where the client will benefit from it going forward.
“I hope I don’t see the nuclear option on this, which tends to be the view that the FSI is going to uphold at the moment, but I hope we have some logical debate and see an outcome that would suit many of those that see the benefit of running an LRBA strategy.”