The risks inherent in limited recourse borrowing are significant and should be considered carefully by self-managed super fund (SMSF) trustees, according to Peter Burgess, technical director of the SMSF Professionals' Association of Australia (SPAA).
Advising caution on the part of SMSF trustees considering such arrangements, Burgess pointed to a fact sheet issued by SPAA which served to highlight those risks.
"A gearing strategy can assist people to grow their retirement savings, but there are significant risks that must be considered before embarking on this strategy," he said.
"It's very much a case of look before you leap."
According to Burgess, the SPAA fact sheet detailed several key risks, including prohibited assets, additional costs that may be incurred, and liquidity requirements where loan repayments are required.
But Burgess stressed that while trustees need to be aware of the risks, there are benefits from such arrangements if they are structured correctly.
"Used in the right circumstances and structured correctly, there can be considerable benefits associated with these borrowing strategies," he said.
"But SPAA is concerned that some people are seeing this type of borrowing as a way into a property investment without realising the potential downside.
"Many seminars and written articles have been devoted to explaining the benefits of these arrangements without necessarily pointing out all of the risks," Burgess continued.
"It's for this reason we issued the fact sheet which explains the key benefits as well as the key risks."
