However, KPMG said when considering restoring the general prohibition on direct leverage, it’s imperative to consider the risks to be managed and alternative mitigants.

For example, if the risk is that SMSFs are being established inappropriately in order to facilitate gearing, this risk could be managed by continuing to focus on “advice-quality” requirements to ensure recommendations to set up an SMSF are in the best interest of the client, KPMG stated.

In addition, if the risk is that SMSFs are borrowing to purchase poor quality assets, additional guidance could be provided by APRA as to the assessment and treatment of these credit risks by lenders, KPMG stated.

The FSI could also consider expanding responsible lending obligations and other protections under the Australian Credit Law to the sale of LRBAs to SMSFs, if the risk is that SMSFs are taking out loans they cannot afford to service.

“Issues associated with SMSF leverage can be overcome or mitigated through effective financial advice, clear and concise guidance materials, and through a robust annual audit,” KPMG said.

“We encourage the [FSI] to examine the information provided by the regulator to new SMSFs, especially information on leverage and gearing within the SMSF.

“The development of clear and concise guidance materials may mitigate the risk associated with leverage within SMSFs.”

KPMG has also suggested the role of the ATO as the regulator of SMSFs could be enhanced through increased funding and resources.