The regulation stipulating a limited recourse borrowing arrangement (LRBA) be used to purchase a single acquirable asset, combined with some of the additional requirements service providers are imposing on these transactions, is making property the only viable investment for this type of gearing strategy, a panel of technical experts has said.
SuperConcepts SMSF technical and strategies solutions executive manager Philip La Greca told delegates at the SMSF Professionals Day Digital 2020, jointly hosted by selfmanagedsuper and SuperConcepts yesterday: “Very rarely does someone build their own share [portfolio using an] LRBA because the economics of doing it just don’t stack up.
“You’d employ an LRBA over a half-million-dollar property, [but] you’re not going to do it over a $50,000 parcel of shares and they do have to be a distinct parcel of shares.
“You can’t [build] a diversified portfolio [using an LRBA].”
According to La Greca, the regulation dictating an LRBA be used on a single acquirable asset means any bundle of shares purchased would have to have the same rights and entitlements attached to it.
“So 500 BHP shares would have the same rights and entitlements, but BHP shares and Westpac shares don’t have the same rights and entitlements,” he said.
Further, he noted from a structural perspective SMSF trustees would have to set up a separate holding trust for each unique share parcel, making the multiple share purchases using multiple LRBAs inefficient and cumbersome.
“So that’s why people buy share warrants rather than do these things themselves,” he said.
“We very rarely see [LRBAs] used [to purchase] anything other than property. We see odd things like large wholesale investments into unit trusts and again that’s because you need to be at that $400,000 or $500,000 [level] to be able to justify it.”
In addition, it was raised during the panel session that some service providers are also requiring any share packages purchased under an LRBA must also have a bank account in the name of the holding trust to service the gearing arrangement, meaning if five equities bundles were purchased, then five holding trusts and five bank accounts would also need to be established.
However, SuperConcepts SMSF technical specialist Anthony Cullen refuted the need to have separate bank accounts in these situations.
“That’s not a requirement when you’re buying a property because ultimately the holding trust is only holding [the asset] on trust for the superannuation fund. [In this instance] it is still the super fund that’s paying for the remaining part of the shares,” Cullen said.
“The money’s coming from the super fund, any dividends paid out need to go back to the super fund, any sales need to go back to the super fund, so it’s a bit unusual the lenders are requiring a bank account at all for the holding trust.”
