I have been reading with interest the government’s response to The Murray Financial System Inquiry’s recommendations and in particular the response regarding self-managed superannuation funds. (Updated Friday, 20 September 2019)
While the Turnbull government appears to have largely accepted all of the other key recommendations including introducing a formal competitive process to govern how default super fund members are allocated to MySuper products and a commitment to raising the “professional, ethical and educational standards of financial advisers”, the government has rejected the FSI’s recommendation to ban SMSF’s from borrowing to buy property through Limited Recourse Borrowing Arrangements (LRBAs).
Personally I’m really pleased to see this outcome. As a property investor myself, I believe that borrowing is a legitimate means to purchase assets and gearing is just another means to invest rather than an investment in itself.
The FSI’s argument is that a ban on SMSF borrowing is necessary to prevent a build-up of risk in the superannuation system and to protect the objective of superannuation being about savings rather than a broader wealth management vehicle.
While it’s not right for everyone, the risks associated with borrowing don’t solely exist in LRBAs and it could therefore be argued that all geared products should be reviewed.
For those not familiar with it, gearing is essentially an arrangement where an individual borrows money to buy an income-producing asset. The income earned from that asset is then used to cover the purchase and maintenance costs of the asset, including repaying the loan. If the costs are greater than the income earned on the asset, individual taxpayers can then offset other income with the loss on the geared investment.
There’s no question that borrowing to invest is a higher risk strategy that relies on the tax benefits and expected returns being higher than the interest costs and management charges on the loan.
However, I personally believe that if you do your research, get sound professional advice and take the time to understand the investment decisions that you are making, including the underlying risks of borrowing, then SMSF borrowing through LRBA’s should continue to be a legitimate financing option for SMSF trustees.
It should also be noted that while the government has rejected the call to ban SMSFs from borrowing to buy property, they have done so based on the fact that they feel there is currently insufficient data to justify it. Regulators including the ATO will be asked to monitor the situation closely and report back to government after three years.
So it seems that there is still a window of opportunity for those interested in evaluating this as an option. While some banks have started to close their SMSF lending options, there are still lenders out there!
I’ve been saying for a while now that time may be running out to take advantage of this strategy. If it’s something you have considered but not yet fully explored, now is the time to do something about it.
Don’t put it off any longer! Give me a call and lets get the ball rolling on maximising your super.