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Keating calls for limits on leveraging in SMSFs
Fuelling speculation that borrowing in super is set to be prohibited, former prime minister Paul Keating’s recent suggestion that the availability of debt to SMSFs should be limited is gathering support.
There has been a “dramatic acceleration” in investor financing which is linked with the ability of SMSFs to borrow, Mr Keating said, according to Fairfax reports.
Mr Keating associated this activity with the surge in Australia’s housing prices, particularly in the capital city markets.
“If I was treasurer today, I would be looking very hard at the whole entitlement or availability of debt to SMSFs. They have gearing available to them and, of course, many of them are taking the option of buying residential property,” Mr Keating said.
Speaking to SMSF Adviser, AMP Capital’s chief economist Shane Oliver said while SMSF borrowing is currently playing a relatively small role in the heated property market, “it’s probably not helping”.
“I think the longer the current rules remain in place, then more individuals will use their SMSF funds to gear into property,” Mr Oliver said. “So Paul Keating is right in alluding to an issue.
“I think there is a real risk there and it was never meant to be the case [that] superannuation investments were to be geared to this degree,” he added.
Mr Oliver said the treasurer should be looking at putting restrictions on borrowing in super, noting the inequities between SMSFs and APRA-regulated funds when it comes to leveraging capabilities.
“Now would be the time to do it rather than wait until it gets too big,” he said.
Since the FSI first sought feedback on restoring the prohibition on direct leverage of borrowing in super, speculation has mounted that the panel will recommend that borrowing in SMSFs be banned.
The SMSF Academy’s Aaron Dunn recently noted the default position of the panel in the Financial System Inquiry’s interim report suggests the panel believes superannuation is better off without leverage.
“It appears abundantly clear from the FSI panel and a range of submissions, including [those from] the Reserve Bank and big four banks, that the days are coming to a close for the use of leverage inside super,” Mr Dunn said.
One of the basic principals of macro economics for collecting higher taxes is to increase spending. When property market heats up - via borrowing or otherwise - more sellers and buyers come in the game, thereby contributing to state (stamp duty) and central governments (CGT) coffers.
I do not understand why would a government should stop borrowing in SMSF when it brings in more money for them.
In any case two or more unrelated SMSF could always borrow by getting together and participating in a geared syndicate or some sort of fancy geared structure.
My prediction is, if direct gearing in SMSF is stopped - mini geared structures will mushroom everywhere and the humble suburbia bean counter will be the main driver after you hand over a licence to them.
The cat is already out of the box and has tasted blood. Deal with it in a humane manner, underline raise interest rates underline.0- Everyone with a vested interest in SMSF, whether they be accountant, financial planner, real estate agent or whoever is likely to argue against this proposal. However, I feel that Mr Keating is correct and that many advisers (that is everyone advising, not limited to financial planners) of these funds need to consider a few key points such as:
what is the purpose of superannuation?
what is the investment strategy of the fund and if it is almost 100% residential investment property is that appropriate?
I dare say there are a few funds out there that totally ignore these questions.
Any reasonable person can see that investing almost exclusively in one asset class is fraught with danger and when the rest of the world is saying that Australian residential property is overvalued, we should listen.0 - Most if not almost all the real rogue behaviour surrounding real estate and LRBA's is in relation to off the plan properties. Remove ability to do LRBA with off the plan and huge portion of problem gone. Off the plan seems to be where the huge commissions are.
Other point is why does it keep getting phrased in binary mutually exclusive terms either yes or no to borrowing. What about yes but more conservatively?
Even LVR's restricted to 50%.
Banning LRBAs outright stops a huge number of people being able to go SMSF and invest in their preferred asset class. IT IS THEIR MONEY!
People should be allowed to do it but on a sensible conservative basis.0 - What a surprise. Mr Keating.
Of course That is the rule of the obvious and applicable today and everyday. That is not news. Where have you been? Super can only borrow in very limeted amounts and situations.Secondly, using SMSF funds for commercial Investments that is exactly how it should be. Ultimately, the beneficiary of that is the goverment through more taxes renevue and the SMSF member. If the the idea of the government was to providing an income for SMSF members in retirement nothing can defeat investing in a portfolio of assest which will deliver that objective. Rather thaned lossing your investment through illed managed corporate investment managers. Where is the risk greater Mr. Keating?0 - Worth a read0
- What is a prudent and reasonable investment for a trustee of an SMSF given the objective of the fund?. A balanced approach to investing, with not too much concentration risk, is what is required. Eliminating leverage entirely would be short sighted and inappropriate. A suggestion: A prudential guideline of a max of 40% the NAV of the fund at the time of borrowing, would be very generous. That would enable a fund with $1m to leverage its exposure to the market by $400K i.e. $1.4m, with $400K debt.There are some practical compliance issues with this approach, but they are not insurmountable...0
- Although I am not for over regulation being a financial planner we are seeing more and more poorly informed people getting convinced by property experts so called to borrow and buy over rated and over priced real estate for their retirement nest egg via their super fund.
This will end in tears and you cant go to the rental property tear off the front gate and go to the super market in retirement and say I will pay with this as the rent I am getting I cant live on.
I would suggest that instead of ASIC getting hot under the collar re insurance commissions they look at this very serious issue with the same venom to which they do in regard to other issues in the space of advise.
In so doing it will calm down the market and allow super to be used for what it was meant to be used for retirement.0 - Hardly a surprise that a bunch of people aligned with the anti-SMSF groups want to erode the basis of why some people exit non SMSF to start their own SMSF.
Not sure exactly who else is going to provide rental accommodation to all of the gen y's who have no money for a deposit and will never be a home owner until their parents pass away or otherwise come into money they have not spent on enjoying life.
There are bad investments and bad gearing decisions everywhere, not just a few in SMSF. What next? Stop people borrowing 95% so when they are in strife they don't have debt that is greater than the value of the property? You can imagine the uproar.0 - I have no issue in banning borrowing to acquire residential property as the conduct of some real estate agents and advisors has been deplorable in this area.
But I fear the approach will be heavy handed and that one of the main uses of SMSF's that is for business owners to acquire business freehold will suffer. When the non concessional contribution caps were introduced it restricted this. When related party lending became possible this opened up flexibility to again help business owners to invest in commercial property.
The debate that is ranging on sometimes forget that our clients are diverse in their educational background, attitudes towards risk, etc. Not all are unsophisticated salary and wage earners who are easy prey.
Leverage is not "bad" in SMSF's any more than geared and hedged managed products are. I highly respect Paul Keating but I'm wondering if he has missed the point here and just bought into the hype.0
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