Borrowing in superannuation was introduced in 2007, for the right reasons to allowing flexibility and control for Australians to build wealth and create financial freedom – in the long term to benefits the retirement of Australian.
Mr David Murray has released the “Financial Systems Inquiry” (“FSI”), a 320-page report which provided 44 recommendations. We will focus on a specific SMSF recommendation, which is Recommendation 8:
“Ban on limited recourse borrowing arrangements”
The FSI Report has found that SMSF borrowing 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”. The Report recommended a restoration of the pre-2007 position that SMSF borrowing should not be allowed.
What is Redwood Advisory – A SMSF Professionals view?
Redwood Advisory like many SMSF Professionals, are against the proposed recommendation to ban SMSF Borrowings. Our belief is as long as SMSF Trustees are properly advised on the risks and benefits of SMSF – the loan to value ratio is reasonable in that the SMSF can service the loan and most importantly, the SMSF complies with Superannuation Law – then there is no reason to ban SMSF borrowings.
In opposing the ban, we need to focus on the statistics available, which states that the largest proportion of SMSF Borrowing is for non-residential property (up to 85 per cent), arranged by educated SMSF investors utilising SMSF strategies – to minimise tax in their business as well as a savings vehicle for their retirement income. This statistic in itself contradicts the findings of the report.
How to eliminate the “ Property Spruikers”
We acknowledge the issue of “property spruikers” – who are targeting SMSF Trustees and property investors in general for many years now. In response to this risk and growing trend, Australian Securities and Investment Commission (“ASIC”) have implemented a dedicated taskforce to investigate and prosecute unlicensed advice. Recently ASIC announced that it commenced proceedings in the Supreme Court of New South Wales against renowned spruiker Park Trent Properties Pty Ltd – watch this space. This is a new space – we need to weed out the poisonous property spruikers, which all SMSF Professions play an important role in educating SMSF Trustees and notifying the regulator when they become aware of unlicensed advice
SMSFs are regulated under the Corporation Law and Property Spruikers are continuing to target non-SMSF investors without the protection of the Corporations Law, which continues to be unregulated. We recommend continued focus on regulating this sector.
Should there be any changes to borrowing?
Well it depends…. Maybe an example will help.
Lets focus on off the plan (“OTP”) investments – a popular investment class in Melbourne, Sydney and increasingly in Brisbane with SMSFs dominating the OTP apartment and house and land property market. There have been concerns expressed by many independent valuer’s in recent years in relation to SMSFs investing in OTP property. In response, many lenders have either excluded OTP property from their lending criteria or limited loan to value (“LVR”) ratio on OTP property. This is a sensible approach in response to the risk posed by an rising investment class – by no means has there been a ‘ban’ on OTP property.
What if I borrow to buy property now and settle in two years?
There is a danger that Superannuation Law may change from the time the contract is signed to the date of settlement. This is of particular concern for OTP purchases where finance will be applied for within 3 months of settlement, and there is a danger based on the FSI recommendation that SMSF borrowing may be repealed by then.
What is the solution?
We support continued analysis of SMSF borrowings including continuing regulation of unlicensed advice, limiting LVR for certain investments, continued education for SMSF Trustees. However a ban on SMSF borrowings will limit an amazing SMSF Strategy for Australians to fulfil their objective of using an SMSF to grow wealth using their SMSF – after all one million Australians now call SMSF home, our voices will not be ignored.