Leveraged Property in SMSF Has Government Support

In a speech on Friday the Assistant Treasurer Josh Frydenberg “Speeches The Future of Super – Address to The Tax Institutegave support to SMSFs and  leveraged property investments within them. 

SMSFs are a great feature of the Australian superannuation system – they promote engagement and competition in the market. Currently SMSFs account for around one third of all superannuation funds under management. As of March this year, there were over 550,000 SMSFs with over one million members. This is up five per cent from the previous year.

There are several ways in which the ATO is trying to help trustees satisfy their obligations.

Borrowing

An issue of particular relevance to SMSFs is the recommendation in the Financial System Inquiry on leverage.

David Murray’s report has recommended a complete ban on limited recourse borrowing arrangements in the superannuation sector.

I am sure this issue is something a number of you have a keen interest in.

It would obviously be inappropriate for me to pre-empt what the Government proposes to do on this issue, as it forms part of the broader Government response to Murray. However, I do want to emphasise that we have been considering the issue carefully. We want to make sure the approach we adopt is proportionate to the risks identified.

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.

Where this happens, it is clearly troubling. But these stories are very much the exception, not the rule.

The available statistics on limited recourse borrowing arrangements, while not perfect, tell us that limited recourse borrowing arrangements remain a very small proportion of SMSF assets, and are 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. 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.

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.

Assisting Self Managed Super Funds

The Government recognises that the majority of SMSF trustees try to do the right thing with regards to their compliance with the superannuation laws. The ATO, together with the SMSF industry and professional associations, are looking to assist trustees comply with their obligations by providing them with timely access to information that is relevant for them, at a time when it is most suitable for them. This includes:

• on-line education packages for SMSF trustees created in partnership with professional associations;
• short on-line SMSF trustee videos;
• SMSF Assist, which allows users to type specific SMSF questions online or into an app, and receive information relating to that topic when they need it;
• a subscription SMSF News service that includes case studies, legislative information and common question and answers.

Professionals are also supported in providing services to their clients. SMSF auditors have been provided with an express resolution service called ‘professional to professional’ and free software to help them complete audits and work through scenarios and case studies.

The methods that are in place ensure that we have enough support mechanisms available to help not only the large funds, but SMSFs as well.

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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