The take-up of limited recourse borrowing arrangements (LRBA) by low-balance funds and the promotion of their use by one-stop shops remain areas of concern for the ATO, despite it finding no systemic risk from the arrangements.
Late last week, the ATO and Council of Financial Regulators (CFR) – which comprises the Australian Prudential Regulation Authority, Australian Securities and Investments Commission (ASIC), Treasury and Reserve Bank of Australia – said LRBAs were unlikely to pose a substantial risk to the superannuation system at the present time.
The ATO and the CFR made the announcement as part of a report based on three years of data, which did, however, identify low-balance funds and the role of property promoters within the SMSF sector as areas it would continue to monitor.
The report noted LRBAs created a significant risk in a low-balance SMSF that had a high concentration to property and where personal guarantees may also be involved.
Additionally, it said LRBAs were common in SMSFs with a net fund size between $200,000 and $500,000 and the average borrowing was $380,000.
“Less-diversified SMSFs with LRBAs are thus exposed to asset concentration risk, which in the event of a fall in the asset’s price, could lead to a significant loss in value of the SMSF,” it stated, adding that where personal guarantees were involved there was also the potential for personal wealth beyond superannuation to be lost.
It also highlighted findings from ASIC in late 2018 concerning SMSF-related financial advice where it raised concerns about the rise of property one-stop shops.
“The integration of services in one-stop shops means that advice provided is inherently prone to conflicts of interest. ASIC’s report showed that one-stop shops often misrepresent the benefits and limitations of LRBAs to consumers,” the ATO/CFR report said.
“ASIC concluded that the strategy of gearing through an SMSF to invest in property, which is being actively promoted by property one-stop shops, is high risk and is often likely to result in financial detriment to SMSF members,” it added.
It pointed out that of the SMSFs that sought advice prior to establishing an LRBA, only 4.1 per cent sought advice from property sales advisers, 52 per cent sought advice from a financial adviser and 35 per cent sought advice from a tax agent or accountant.
