Personal guarantees needed for LRBAs

Calls to prohibit the use of personal guarantees to support limited recourse borrowing arrangements (LRBAs) fail to understand this is part of almost all lending to small business, according to commercial property lender Thinktank.

Per Amundsen, head of research, said the reasoning behind this practice was quite simple as the ultimate beneficiaries were those individuals whose guarantees were sought.

“Guarantees used to support LRBAs are specifically provided for in the SIS Act and ensure that their recourse to other self-managed superannuation fund (SMSF) assets is no less limited than the original lender, and if funds are provided as a source of repayment these are then deemed to be contributions to the SMSF,” Amundsen said.

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The Financial System Inquiry in 2014 and Council of Financial Regulations in February 2019 recommended their abolition, as well as it being Labor’s policy in the last election.

The Government had resisted recommendations to end SMSF borrowing, although it wanted another review in three years.

Despite the proposal not being adopted, the Council of Financial Regulators report still concluded LRBAs posed no systemic risk to the superannuation system.

“It’s recognised that owner-occupied business premises make up a large part of this type of funding and that SIS Act regulations were specifically designed to allow for them,” Amundsen said.

“The benefits this offers to SME operators in planning and providing for their retirement cannot be questioned.

“The statistics published by the regulator continue to show that LRBAs remain at a level that is nowhere near problematic for SMSFs and that the real problems identified can and should be effectively dealt with through regulation and enforcement to eliminate any identified abuses.”

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