Leading national financial services provider, Partners Wealth Group (PWG) is strongly opposed to FSI recommendations to remove S67 of SIS, the section that allows a self-managed super fund to borrow using a limited recourse borrowing arrangement (LRBA).
This recommendation is part of the final report from the Federal Government’s Financial System Inquiry (FSI) which was released today.
The FSI believes if the level of borrowings, from a fairly small level, was to continue to grow at its current rate, there was a ‘potential risk’ to the financial system and that implementation of the recommendation would prevent this.
Over the past five years LBRA borrowings by SMSFs have grown from $$497 million in June 2009 to $8.7 billion in June, 2014.
Partners Wealth Group Joint Managing Director, Martin Murden, argues that there is no heightened risk associated with funds borrowing to invest and that the removal of S67 would be “grossly unfair”.
“To start with, there are very significant restrictions imposed on SMSFs investing using borrowings, the vast majority of which are in property. Before a loan can be approved, a financial planner must prepare a report confirming the suitability of the investment and a fund must put down 30-35 per cent of the loan which in itself automatically restricts the number of potential investors.
“In addition to this, a separate trust must be established to hold the property while the debt is being repaid and a SMSF cannot increase the borrowings because of an increase in the property’s value.
“Personal investors on the other hand, can invest in a company that is heavily geared on the stock market or go into a bank and increase their borrowings and use this for a deposit for another property. They have none of the restrictions that SMSFs have.
“You do the maths and tell me which is the riskier?” asks Mr Murden.
He says on the question of risk, it is worth pointing out that SMSFs paying pensions or income streams are highly unlikely to be in a situation where they are paying interest on their borrowings.
“The very idea of borrowing to buy is out of the question at this stage,” he says, “the reason being these funds will be seeking income in order to pay benefits to members. And if they have debt to service, there may be restrictions on the amount that can be paid without having to redeem investments.”
Currently over 50 per cent of SMSF members are over the age of 55.
