Financial advisers should still warn clients about the risks of limited recourse borrowing arrangements (LRBA) despite a recent government report finding they posed few risks to the superannuation system.
Institute of Financial Professionals Australia head of superannuation Natasha Panagis said the recent report from the Council of Financial Regulators had shown the ATO letter writing campaign of 2019 had shifted the concentration of assets linked to LRBAs but advisers should still warn clients about the issue.
“Back in 2019, the issue of diversification was raised when the ATO sent out letters to around 18,000 SMSF trustees who held more than 90 per cent of their fund’s investments in one asset class, which was primarily property, and where 98 per cent of them had acquired property under an LRBA,” Panagis said during an online briefing.
“Since this mail out the concentration this has steadily improved and, of the funds that were sent a letter, the concentration risk in one asset has reduced from 90 per cent to 80 per cent,” she explained.
Panagis noted while these figures remained high, LRBAs were still an important tool for SMSFs to purchase business real property and residential property but they should not be recommended for every SMSF.
“LRBAs can still represent significant risks, particularly for those people who have low balance SMSFs and personal guarantees in place,” she warned.
“A high asset concentration is going to be at most risk, particularly where there are property fluctuations, and the high interest rate environment that we have at the moment, which is not going to play in their favor.
“So make sure that clients’ investment strategies meet superannuation regulations and are diversified, that there is liquidity and also consideration of the insurance needs of members, because at some point, the member’s balance will eventually need to be paid out.
“We need to deal with that consideration up front, which means clients with lumpy assets need to plan well ahead and make sure the fund has enough liquidity to meet any cash obligations if an emergency arises.”
