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LRBA, Property, Regulation

SMSFA fights LRBA ban

SMSF Association opposed to outright ban on LRBAs.

The SMSF Association has vehemently opposed any outright ban on limited recourse borrowing arrangements (LRBA) and called for more consumer protection for the debt instrument.

In its nine-page submission to Treasury for the Council of Financial Regulators’ review of LRBAs, the association said it does not believe “LRBAs are creating systemic risk in the SMSF sector or broader superannuation sector and that their use in allowing small business owners to transfer business real property is crucial to their retirement savings plans”.

SMSF Association chief executive John Maroney said if the government is concerned about risks relating to LRBAs, banning the use of personal guarantees supporting these arrangements could reduce these risks.

Maroney added raising SMSF education requirements for advisers could help alleviate risks.

“Personal guarantees given by SMSF trustees do allow the SMSF to undertake larger borrowings with higher LVRs (loan-to-value ratios),” he said.

“So, although the association is comfortable that most SMSF borrowing is being made within sensible LVR limits, prohibiting SMSF members from providing a personal guarantee for their borrowings would make it more difficult for lenders to make risky, high LVR borrowings to SMSFs.

“Lenders would also need to be certain that the SMSF is able to adequately service the loan based on the financial circumstances of the SMSF members within the superannuation system instead of looking at circumstances and assets outside superannuation.”

Further, he said getting rid of personal guarantees would limit the ability of property spruikers to use LRBAs as a way of encouraging individuals with small retirement savings balances to establish an SMSF for the purpose of purchasing property or participating in speculative property investments.

The association re-emphasised the need for advisers who set up SMSFs to complete specialist SMSF education, a view reflected in the Productivity Commission report on the competitiveness and efficiency of the superannuation system, as well as the Australian Securities and Investments Commission’s “Report 575 SMSFs: Improving the quality of advice and member experiences”.

“We believe this policy measure would further limit the ability for property spruikers to establish SMSFs and sell properties,” Maroney said.

“Tightening licensing requirements around LRBA advice and increased scrutiny of this type of advice could assist in ensuring the integrity of LRBAs.”

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