Is time up for SMSF lending?
Thursday, January 15, 2015/
Last month, the government released it’s latest Financial Systems Inquiry Report.
The Inquiry led by David Murray laid out a ‘blueprint’ for the financial system over the next decade. It has been 16 years since the last 1997 Wallis report which led to ASIC and APRA being setup, amongst other things. The previous Campbell report in 1981 led to the floating of the Australian dollar and the deregulation of the financial sector.
In short, this is an important report that is listened to and will have impacts on the way financial system moves forward.
One key recommendation in the report was to ban leveraging (borrowing) within superannuation and therefore the removal of limited recourse borrowing arrangements (LRBA). LRBAs have been growing at an astounding rate as property investors have been able to use all the tax benefits of self-managed super funds to buy investment properties in a low tax rate environment. Obviously with the love of property Australians have, this has been a great idea for some and not so great for others.
The reason Murray is worried about borrowing and for considering banning these arrangements is due to the leveraging of assets may destabilise the superannuation industry sometime in the future if property prices should fall. He is also concerned by the shear number going forward and does this make our superannuation industry property heavy.
The government may after the consulting period which finishes on 31 March 2015 decide to make an immediate change from any day going forward. If it believes it is a wise suggestion, they would remove the ability to borrow inside superannuation for property and make this change for future arrangements only and all current SMSFs can continue as normal.
So is this an opportunity you could miss?
It is important to be very mindful that this is not for everyone. Investing in any property has different associated risks and especially when using debt. One of the drivers for change, is down to there being greedy property spruikers that have been targeting lower balance disgruntled superannuation members with new properties for sale.
Spruikers have been using Australians love of property as bait and selling properties to unsuitable super members. This is the real risk for this strategy; purchasing poor property at top prices with no diversification in place or buffer if things should go wrong. I have seen this first hand. I have been offered and absolutely refused the opportunity to sell horrendous investment properties to my clients for huge commissions. This is a disaster waiting to happen and I have been actively against this type of behaviour for many years.
Putting this to one side; For some purchasing a great, sound, highly sought after investment property in an SMSF can however be an absolute brilliant strategy to build wealth for retirement in a diversified way. The tax advantages of Superannuation means debt can be repaid faster with lower tax on contributions and rental income. It does however solely come down to it being an outstanding property – one characterised by limited supply and an ever increasing demand.
It can give you a great low volatile asset and with the power of debt can increase your exposure to the investment market by three to four times what you are currently have in an investment portfolio. While this is not suitable for all, if you are currently contributing more than $15-20,000 per year, have over $300,000 in your family super funds and have at least five years till you retire; you may like to consider it before the opportunity may go in 2015.
However, If you are still under $200,000 and still growing your contributions, I would sit tight and wait a few years before even looking at it.
I am actively disagreeing with the removal of LRBAs as i believe it should be the right for investors to decide how their superannuation is invested. I do however want greater attention on property spruikers and developers who are selling these without any concern on the effect it has on the person buying.
Chris Bates is a director of financial advisory firm Canopy Private.
This story originally appeared on StartupSmart.