LRBAs cleared of risk towards SMSFs
The Council of Financial Regulators (CFR) has delivered the findings of its report on the potential risks of limited recourse borrowing arrangements (LRBAs), stating it poses no material risks towards the superannuation system.
The chief executive of the SMSF Association, John Maroney, said the association has stuck by its initial response to the CFR in 2019 that an “outright ban on LRBAs” could be circumvented by working towards “mitigating” its risks towards SMSFs.
“What has occurred in the intervening three years reinforces our view that a ban on LRBAs would be overkill, with the report highlighting that SMSF borrowings remain a small percentage of total SMSF assets and, as such, pose little risk to financial stability while assisting many small businesses, in particular, meet their retirement income goals,” he said.
“We have long supported a crackdown on their activities and believe ASIC has done much to curtail their nefarious activities.
“But the fact they still operate highlights the need for the entire sector to remain vigilant to ensure this debt instrument remains available to the vast majority who use it responsibly.”
Maroney also highlighted the integrity measures introduced in 2018 that assisted in easing the risks associated with LRBAs, including making changes to the total superannuation balance and non-arm’s length income rules (NALI).
“In our opinion these measures have greatly improved the system, helping ensure LRBAs are used responsibly,” he said.
“That said, it is important for SMSF trustees considering an LRBA to get specialist advice as they can be complex arrangements which require carefully assessment of the risks, benefits and costs.”
There is a big difference between “no material risk to the superannuation system”, and very high risk to individual members who use the dangerous SMSF/LRBA/property cocktail. Also bear in mind that one of the biggest potential downsides to these arrangements has nothing at all to do with the superannuation system. It is the non super personal guarantees that members have to give for the “Borrowing Arrangement”. “Limited Recourse” means limited recourse to the super fund. There is still full recourse to the member, for any amount of the loan the super fund is unable to repay.
Any licensed adviser recommending or endorsing these arrangements is playing with fire. When they start imploding, as they inevitably will, licensed advisers will be the primary targets for blame. Of course we all know most of these arrangements were recommended by property spruikers and implemented by unlicensed accountants. But they have regulatory immunity. Licensed advisers are the primary target for regulatory persecution, and will cop all the blame when SMSF/LRBA/property arrangements go wrong.