Frydenberg’s positive signal on SMSF LBRAs
The Federal Government has sent a clear signal that it does not intend excluding self managed superannuation funds (SMSFs) from borrowing within superannuation, although it may tighten up some of the underlying rules.
The Government's intentions have been revealed by Assistant Treasurer, Josh Frydenberg in an address to the Tax Institute in which he acknowledged the recommendation of the Financial System Inquiry (FSI) that there be a complete ban on borrowing within super for SMSFs but suggested that misuse of such arrangements were rare.
"We have all heard unhappy stories of property spruikers providing inappropriate advice to people, encouraging them to start up SMSFs in order to gear up and buy a flash new apartment off-the-plan. Then the property price plummets or the rent dries up, and the member is left either wiping out their super balances by liquidating other assets, and possibly losing the family home they've offered up as a personal guarantee. There may also be liquidity issues when funds move into pension phase," Frydenberg said. "Where this happens, it is clearly troubling. But these stories are very much the exception, not the rule."
He said the available statistics on limited recourse borrowing arrangements, while not perfect, suggested that limited recourse borrowing arrangements remained a very small proportion of SMSF assets, and were more often invested in commercial property than in residential high-rises.
"Forty-two per cent of limited recourse borrowing arrangements — or around $3.5 billion — were invested in residential property in mid-2013," he said.
"To put this in context, that means that only 0.07 per cent of Australian residential property — perhaps 6,500 dwellings — were held by an SMSF through a limited recourse borrowing arrangement in 2013."
"Leverage always carries risks. Lenders recognise this in their loan to valuation requirements," Frydenberg said.
"And while we do not intend to ignore these risks, we need to make sure that our response is proportionate to the problem the FSI identified."
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