Borrowing in superannuation is not new. Every day retail, industry and public sector funds as well as SMSFs invest in managed funds, shares and many other types of investments where the managers or directors of those companies have chosen to borrow to further unit holder or shareholder returns. During the global financial crisis (GFC) highly leveraged companies moved into the cellar very quickly. Remember ABC Learning?
And certainly the amount of leverage at any point in time is not necessarily transparent. Apart from feasting on indirect leverage, Australians are also highly leveraged into residential and commercial property personally or through their family trusts. The size of the housing lending market dwarfs the entire super system and has proven a viable wealth creator for the baby boomers outside of superannuation.
Against this ocean of Australian leverage, both inside and outside of superannuation, is the trickle that represents SMSF borrowing. A subject much talked about and in many cases much maligned, SMSF borrowing is by far a minnow, with only $10 billion in assets subject to limited recourse borrowing arrangements (LRBA).
Still, it was the subject of a whole section of the Financial System Inquiry’s final report, notably without any SMSF experts on the panel, where the panel noted as follows: “Further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system.
“Direct borrowing by superannuation funds could pose risks to the financial system if it is allowed to grow at high rates. It is also inconsistent with the objectives of superannuation to be a savings vehicle for retirement income. Restoring the original prohibition on direct borrowing by superannuation funds would preserve the strengths and benefits the superannuation system has delivered to individuals, the financial system and the economy, and limit the risks to taxpayers.”
Trustees have their say
The Australian SMSF Members Association (ASMA) surveyed its more than 6000 members in relation to borrowing and this is what they said:
Question 1: Have you used leverage or borrowings in your SMSF investments? This may include instalment warrants, protected share loans or SMSF borrowing arrangements for property.
- 60 per cent of respondents stated that they did not use any direct borrowing in their SMSF,
- 20 per cent replied that they did borrow, but in products such as instalment warrants, and,
- 20 per cent had engaged directly in an LRBA using property or shares where the pre-2010 rules were in force.
As can be expected, ASMA members are the most engaged of the SMSF fraternity, so the higher SMSF borrowing may be expected. In terms of the asset size of their fund, the average ASMA member is also at the higher end of the spectrum and thus more aware of the opportunities and risk that engaging in SMSF borrowing would ensue for their particular fund.
This is amply evidenced by the next question, which went directly to the heart of both direct and indirect leverage in an SMSF.
Question 2: At what age would you stop using leverage or borrowings to add wealth to your SMSF for your retirement?
- age 45 – 2 per cent,
- age 55 – 24 per cent,
- age 65 – 28 per cent,
- age 70 – 19 per cent, and
- our fund does not use leverage – 27 per cent.
This reiterates the understanding ASMA members have of the impact of leverage on their financial wellbeing through various stages of life and not just at a younger age – age and leverage does not weary them.
In terms of whether ASMA members were going to borrow in the short term, the following question was asked.
Question 3: In the next 12 months do you intend to borrow in your SMSF?
48 per cent had no intention of borrowing with their superannuation,
18 per cent believed they would borrow using an instalment warrant or packaged product, and
34 per cent confirmed they would be borrowing through their superannuation to acquire a property.
And finally a question, along with this survey, we will be providing to the government in terms of member feedback on the issue of borrowing in superannuation:
Question 4: The government is looking to review the borrowing laws, particularly as they relate to SMSFs. What do you think of this?
- the government should review the rules for all super funds and not just SMSFs – 39 per cent,
- the government should prevents SMSFs borrowing – 9 per cent, and
- the government should keep their hands off borrowing in superannuation – 52 per cent.