The growth in the number SMSFs reporting limited recourse borrowing arrangements (LRBA) has steadied and is now increasing at a manageable rate, the latest ATO report on the sector has revealed, with some noting this has reduced the sector’s risks around these investments.
According to the ATO’s statistical overview of the SMSF sector for the 2018 financial year, total LRBA assets grew from $41.56 billion in 2016/17 to $43.39 billion in 2017/18 and the proportion of SMSFs reporting LRBAs grew from 9.5 per cent to 10.2 per cent.
By contrast, total LRBA assets in 2015/16 amounted to $27.02 billion, with 7.3 per cent of SMSFs reporting LRBAs.
In its analysis of the ATO’s data, the SMSF Association said: “A risk commonly raised in discussions on SMSFs is LRBAs.
“There is no doubt that in the current economic climate, where rental incomes may be reduced or suspended, some SMSFs with property may be facing unexpected risks.
“However, from a broader picture, the 2017/18 statistics highlight a flattening of LRBA growth and an acceptable level of LRBAs to borrowing.”
The association also noted the “reasonable” risk profile of SMSFs with respect to LRBAs when highlighting the asset allocation of SMSFs by fund phase.
Investment in LRBAs had dropped from 14 per cent in accumulation phase to 2 per cent in retirement phase, it pointed out.
“What is most evident is that when SMSFs enter the retirement phase, they are generally doing so without LRBAs and moving to more liquid assets,” it added.
According to the ATO’s 2017/18 data, listed shares made up 29.1 per cent of total SMSF assets and cash and term deposits made up 21.6 per cent, which the association said was partly driven by a preference for liquidity to pay pensions in retirement.
“A positive for the sector is that many SMSFs should be able to navigate through this pandemic from a better starting point than some of their counterparts,” it said.
“This is an outcome of a generally older cohort of investors requiring more liquid assets to service their retirement living expenses. The benefits of the financial adage about holding two years of income in cash should bear fruit for many SMSF trustees.”
As part of its report on the SMSF sector, the ATO also found the level of SMSF wind-ups hit a record high during the 2018 financial year, while new establishments fell away.
