IFPA rejects LRBA ban reasoning

The Institute of Financial Professionals Australia (IFPA) has added its voice to the criticism of the government’s decision to ban SMSFs from using limited recourse borrowing arrangements (LRBA) to acquire residential property, noting this type of lending facility actually reduces risk for consumers.

“Borrowing through an LRBA is often less risky than borrowing in a personal name. The lender’s recourse is limited to the single asset held in the bare trust. The fund’s other assets are quarantined, so the fund cannot lose more than that one property that has been borrowed against,” IFPA head of technical services Stuart Sheary explained.

“Also lenders typically apply more conservative loan-to-value ratios to SMSFs than to individual investors so the case for a blanket ban has not been made out.”

In addition, the industry body has rejected the claim the ban will provide a solution to the lack of housing currently available across the nation.

“A measure touching a fraction of 1 per cent of the market is unlikely to move house prices or change supply,” Sheary pointed out.

According to Sheary, the argument put forward that this amendment would close a loophole available to wealthy investors was also flawed.

“Super is already a concessionally taxed environment. The value of any deduction for interest is therefore small and far smaller than it would be for an investor on the top marginal rate,” he said.

Further, IFPA recognised many SMSF members did not possess large enough balances to purchase property without the use of gearing, meaning the ban will restrict access to this asset class for these individuals.

“For these reasons, IFPA does not support the ban on new residential LRBAs. The structure is conservative by design and there is little tax advantage to remove. The ban will not move house prices or add to supply. What it will do is close off a legitimate asset class for the many SMSF members whose balances are not large enough to buy property outright,” Sheary reiterated.