Education key on limited recourse borrowings
While there is a place for gearing strategies to help people grow their retirement savings, the SMSF Professionals' Association of Australia (SPAA) has said that it is imperative that people understand the risks involved before going down this path.
Adding SPAA's voice to the industry's growing concerns over the use of limited recourse borrowing arrangements, SPAA education and professional standards director Graeme Colley said that understanding was key not only to the arrangements' successful implementation but also to avoiding their inherent risks.
"People have to understand that a limited recourse borrowing arrangement that doesn't comply with government regulations can have serious financial consequences for trustees," he said.
Colley added that SPAA's strong position on limited recourse borrowing meant that it was in full support of the Federal Government's move to change the Corporations Regulations to have these borrowing arrangements designated a financial product.
"If this change can be implemented, it will mean that only professionals licensed to provide financial advice can advise on limited recourse borrowing arrangements," he said.
"They will be required to consider a client's complete financial circumstances, not just those that relate to the borrowing arrangement in isolation."
According to Colley, SPAA's only point of difference comes down to the treatment of listed recourse borrowing as compared to the treatment of derivatives.
"SPAA contends that the value of a derivative is obtained from the underlying asset, such as options over shares, which is a quite different arrangement to a debt facility that has be organised to buy an asset for a superannuation fund," he said.
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