No ban on SMSF property borrowing just yet
According to the Assistant Treasurer Josh Frydenberg, there will be no ban on Self Managed Super Fund (SMSF) property borrowing. However, it is likely that there will be tougher regulations implemented instead.
During the Tax Institute annual superannuation conference in Sydney on Friday, Mr Frydenberg said that the Abbott government is not planning to ban limited recourse borrowing arrangements (LRBAs) through SMSFs to purchase property.
In December 2014, David Murray released his report, the Financial System Inquiry, which recommended LRBAs to be banned in SMSFs due to them posing a risk to the financial system over time.
Mr Frydenberg stated that “I want to emphasise that we have been considering this recommendation very carefully but flag that we want to make sure the approach we take is proportionate to the risks that have been identified."
He also added that "To put it in context only 0.07 per cent, perhaps 6,500 properties, were held in an SMSF through a limited recourse borrowing arrangement in 2013”.
The biggest concern that Mr Frydenberg has is that there are some property spruikers out there who are influencing people to set up an SMSF, allowing them to borrow money against their retirement savings to make a speculative property investment. However this is the exception rather than the norm and there are many people out there who do use their SMSF borrowing sensibly to provide for a comfortable retirement in the future.
According to analysis, out of the total pool of assets invested in the $580 billion SMSF sector, only a small percentage is made up of investment properties, and most of this is commercial property belonging to business owners, rather than residential real estate.
"David Murray highlighted the risks associated with increased leverage in the financial system. Increased leverage always represents a risk and we recognise that. The government also recognises that most SMSFs do the right thing".
Rather than banning SMSF property borrowing altogether, the rules around how SMSFs can borrow to invest should be tightened. There is also the option to target property spruikers.
Other ideas include forcing stricter limits on the amount of super savings a person can borrow, whilst remove personal guarantees.
If a ban on SMSF property borrowing was to go ahead, it is thought that this would disadvantage a large majority of trustees who actually do use their debt responsibly to boost their retirement savings and understand that a property is a long term investment and not a quick win.
According to Mr Tanzer, there are rules in place now where a person can set up a self-managed super fund to get a loan to buy an investment property that is held in a separate trust account. Any profit earned from the property will be sent to the trustee; however if the loan defaults then the bank’s rights are limited to the value of the trust’s assets.
This structure has been implemented with the intention to protect people from losing all of their super in case things went pear shaped. However, a personal guarantee in most instances needs to be provided such as the family home, in case the investment takes a turn for the worse.
Interestingly, over the last five years to 2014, the amount of these loans has increased almost 18 times and now stands at $8.7 billion according to Murray’s report. This would worsen the impact of any downturn in both Sydney and Melbourne which are both currently booming in the property cycle.
In order to protect themselves, numerous banks have already started to tighten up their approval processes in the last few months.
Further details about SMSF property borrowing will be announced as soon as the Abbott government makes its formal response to the Financial System Inquiry. This announcement is expected to be within the forthcoming weeks.
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