Property froth or bubble?

Darren Kingdon

The Australian Taxation Office (ATO) has released its quarterly SMSF statistical report for June 2014, providing some intriguing insights into the overall health of the sector and its alleged contribution towards overheating the property market.

Currently, there are estimated to be more than 534,000 SMSFs with over 1.01 million members holding total assets of about $557 billion.

Interestingly, the recent ATO statistics have shown a sharp increase in the asset value of limited recourse borrowing arrangements (LRBA).

Revised ATO figures reveal LRBA assets totalled $8.3 billion as at June 2013 (previously published at $2.6 billion). Since that time, assets held under LRBAs have increased further to $8.7 billion as at June 2014.

However, the ATO has said it is “unconcerned” about the sharp recent rise, stating the “sky isn’t going to fall in”, with assets subject to LRBAs representing less than 2 per cent of total assets.

By way of explanation, the ATO has indicated:

  • The updated estimate of LRBA assets is in part due to the real growth of LRBAs over the 2013 financial year, but is mainly due to the ATO’s new approach to collecting LRBA data and changed labels on the SMSF annual return. While the new method means it is difficult to accurately report recent growth of LRBAs, it will provide a more accurate point from which to determine future growth.
  • As a result of the new data collection system, some amounts previously reported as property assets are now being reported as LRBAs, resulting in a decrease of $6 billion for real property assets compared to the $5.6 billion increase in LRBA assets.
    Notwithstanding the new system and revised figures, the current SMSF asset allocation indicates a well-diversified sector.

With all of the talk of a property bubble about to explode as a result of SMSF investment overheating the sector, there are a few points worth noting:

  • Residential property, which is the primary target of property spruikers, comprises a relatively modest 3.51 per cent of total gross SMSF assets.
    LRBAs, subject to much negative press at the moment, comprise only 1.57 per cent of the gross SMSF asset base.
  • According to ATO assistant deputy commissioner of superannuation Stuart Forsyth recently, only “2.7 per cent of SMSFs hold LRBAs” and “when you get behind those stats, something like 46 or 47 per cent of those assets [are in] commercial property, low 40s [per cent] are in residential property, and a tiny amount in shares”.
  • The property sector overall appears to be well represented, with commercial and residential property comprising 15.17 per cent of the total gross asset base. In addition to this exposure and its majority interest in LRBAs, anecdotal evidence would also suggest a high proportion of property holdings are invested indirectly via private unit trusts and companies, which makes up 9.83 per cent of the sector.
  • Greater areas of risk for SMSFs in our view relate to debt, loans, collectables, personal use and other (undefined) asset classes, where investment risks are expected to be considerably higher than those posed by LRBAs.

In our view, the SMSF sector as a whole appears to be in good shape and is well diversified. That said, some fine-tuning of the LRBA framework would be welcomed, particularly in relation to promoters that push the prudential boundaries.

However, much of the negative press concerning LRBAs is overstated in our view and could easily be managed with some simplification measures, the capping of loan-to-value ratios and perhaps a statutory interest rate for related-party loans.

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