Investors should expect SMSF borrowing to come under greater government scrutiny

Investors should expect regulations that allow self-managed superannuation funds to borrow to buy property to come under government scrutiny in the coming months, an expert in the area has said.

In February, Assistant Treasurer Arthur Sinodinos ruled out a specific review into limited recourse borrowing arrangements which SMSFs use when taking out loans to buy property.

Macquarie Bank executive director David Shirlow told Property Observer it was unlikely that the government would change its position, despite Senator Sinodinos standing aside and Finance Minister Mathias Cormann taking over as Acting Assistant Treasurer.

“Whilst the prospect of a separate and specific review of the matter is off the policy agenda for the time being, there are still some live policy issues in borrowing through super,” said Shirlow, who specialises in SMSFs and sits on the board of the SMSF Professionals’ Association of Australia (SPAA).

He said some stakeholders had argued that it was inappropriate for SMSFs to borrow for property investment at all, and that further constraints on advice provided regarding limited recourse borrowing arrangements and product offerings could be considered.

The arrangements are likely to be examined as part of the Financial System Inquiry, which is due to publish an interim report in mid-2014 and a final report by November.

Numerous submissions to the Inquiry have called for government to review SMSF borrowing and put in place additional consumer protection measures and education for trustees.

Big four accounting firm KPMG noted in its submission that super funds were tax-exempt in the pension phase, which provided incentives for SMSFs to invest in long-term assets such as residential property, and even more so if the property was negatively geared.

The Institute of Chartered Accountants in Australia strongly encouraged a review of existing arrangements to ascertain whether borrowing was appropriate and, if it was, to ensure the right legislative and regulatory frameworks were in place.

Mid-tier accounting firm Chan & Naylor called for urgent action to create a dedicated national SMSF educational framework, lead by the Australian Securities and Investments Commission (ASIC), to teach the public about the merits and pitfalls of SMSF investments.

The Reserve Bank of Australia noted that SMSFs borrowing could expose members to greater financial risks (including excessive concentration in a single asset) than they understood they were taking.

CPA Australia raised concerns about the appropriateness of advice received by SMSF trustees and members, and potential misinformation being provided by unlicensed advisers such as real estate agents, mortgage brokers and property developers.

Shirlow said ASIC considered itself to have jurisdiction, under the Corporations Act, over some aspects of property sales people giving advice on limited recourse borrowing arrangements.

“Stakeholders such as SPAA would argue that there should be some more definite consumer protection rules in place to make sure that property spruiking is not going to lead to disaster,” he added.

The Association of Superannuation Funds of Australia has previously advocated for advice to SMSFs on asset classes such as investment property and limited recourse loans to be provided only through licensed financial planners.

This article first appeared on Property Observer.

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