The Financial System Inquiry (FSI) Report has made a few recommendations and the SMSF industry, one can say with conviction, is not all too happy with them. If Campbell Report in 1981 deregulated the financial market and Wallis report led to the setting up of APRA and ASIC in 1997, the FSI Report about SMSF lending may have the industry rushing for cover.
Limited Recourse Borrowing Arrangements
There is a definite push towards banning Limited Recourse Borrowing Arrangements (LRBAs). The FSI believes that the playing field is far from level and that the SMSFs can use leveraging to gain access to the residential properties in a low-tax environment in a way their traditional peers may not even dream of.
Undeserved leverage, shouts FSI
In fact, this kind of leverage has given birth to a substantial amount of borrowings via SMSF, feels the FSI. The trend, the FSI fears, may end up encroaching on the economic fundamentals. What perhaps remains to be answered by the report is the fact that residential investments make for a mere 3.5% of total SMSF assets and how this mini pool can disturb the equilibrium of the economy.
Yes, there is a valid counterpoint. The percentage of residential real estate investment through SMSFs may still be miniscule, but the number of investors indulging in it has increased roughly 1800% since the last 5 years. At this rate, the figure ‘3.5%’ may not remain so for long.
LRBA should stay
To me, LRBAs should stay. The power of leverage cannot be substituted quite as well, and it may even be a deep need of the economy, a point that the FSI report is missing. All we have to be aware of is the presence of spruikers who are pushing SMSF trustees into rogue sales for their own commission and comfort.
