The SMSF Association has recommended two courses of action it feels could mitigate the risks involved with limited recourse borrowing arrangements (LRBA), thereby avoiding having to ban these strategies completely.
The industry body’s suggestions have been made in response to the Council of Financial Regulators (CFR), which reported to the federal government last Friday that it found the use of LRBAs did not create a systemic risk in Australia’s financial system.
The CFR did, however, acknowledge employing an LRBA could pose a significant risk for SMSFs with low balances and poorly diversified portfolios.
“The SMSFA has consistently noted the importance of LRBA strategies for small business people investing in business real property and the flexibility they bring when used appropriately, and, accordingly, has not supported a total ban of LRBAs,” SMSF Association chief executive John Maroney said.
“However, we have recognised risks pertaining to LRBAs such as those raised by the CFR and believe a better approach is to mitigate the risks cited in the report before considering a ban, and to this end we have recommended two key measures to ensure LRBAs are used appropriately – banning the use of personal guarantees supporting LRBAs and increasing SMSF education requirements for advisers.”
According to Maroney, the banning of personal guarantees for LRBAs would mean the gearing strategy would only be used by SMSFs with larger and more diversified asset balances where the investment strategy is less reliant on a highly geared single asset.
“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 instead of looking at circumstances and assets outside superannuation,” he said.
With regard to its call for increasing the education requirements of SMSF advisers, he said this suggestion is in line with other recent reports examining the sector.
“The association also believes that advisers who provide advice to individuals about SMSFs should have specific SMSF education and qualifications that underpin their advice, a notion that was reflected in ASIC’s (Australian Securities and Investments Commission) Report 575 about raising education and a specific SMSF qualification for advisers wanting to provide SMSF advice. The Productivity Commission has also recommended that advisers who set up SMSFs should be required to have specialist SMSF education,” he said.
“Ensuring that SMSF trustees who seek advice about using LRBAs receive high-quality, specialist advice will also ensure that LRBAs are being used appropriately and without excessive risk.”
