Labor vows to stop SMSF borrowing

By Tim Stewart

27 April 2017

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Labor has promised to ban direct borrowing by SMSFs as part of its new housing affordability package.

Labor's proposal to ban limited recourse borrowing arrangements (LRBAs) by SMSFs to purchase property has the backing of Financial System Inquiry chair David Murray.

Mr Murray's final report in December 2014 recommended the restoration of the prohibition on SMSF borrowing that was lifted in 2007.

The report stated, "Further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system."

Industry fund lobby group the Australian Institute of Superannuation Trustees (AIST) was quick to welcome the new measures, saying it would "reduce competition from investors and also help reduce risk in the super sector".

AIST chief executive Eva Scheerlinck said, "Banning recourse borrowing by SMSFs was recommended by the Financial System Inquiry with good reason.

"Allowing SMSFs to take on extra risk through borrowing potentially affects everyone as it is the taxpayer who ultimately underwrites this risk through the provision of the age pension when things go wrong."

But the SMSF Association noted that the Coalition government rejected Mr Murray's recommendations to reinstate the ban on SMSF borrowing in 2015, and "there is no compelling argument to suggest anything has changed since regarding LRBAs".

"The most recent Australian Tax Office statistics show that SMSFs hold $24.3 billion in LRBAs, with these financial instruments being predominantly used to invest in residential and non-residential property in an almost 50-50 split," said SMSF Association chief executive Andrea Slattery.

"That estimated $12 billion where SMSFs have used LRBAs to invest in residential housing has to be put in the context of a $6.43 trillion housing market. In other words, LRBAs comprise only 0.18 per cent of the market. On these figures, it’s hard to argue LRBAs are a ‘market mover’.

"The idea that SMSFs have plunged into property investment in recent times also is not borne out by the statistics, with SMSF residential property holdings (both geared and ungeared) being consistent between 4-6 per cent of total SMSF assets in recent times."