Overview

In late 2013 the Federal Government established a Financial System Inquiry to hold a ‘root and branch’ review of Australia’s financial system to help establish the direction for our country’s financial future.

The Inquiry’s Final Report was released in December 2014 with the Government releasing its response to the recommendations in October. All recommendations were accepted, except for one – the recommendation to prohibit direct borrowing for limited recourse borrowing arrangements by superannuation funds citing that:

“While the Government notes that there are anecdotal concerns about limited recourse borrowing arrangements, at this time the Government does not consider the data sufficient to justify significant policy intervention.”

Background

The ability for superannuation funds to borrow directly to invest is still in its relative infancy, having only been in place since 2007.

Its take up by SMSFs has been relatively low, with the reported value of assets under limited recourse borrowing arrangements comprising a little over 1.5% of the total SMSF pool of $557 billion. Nevertheless, there have been continued calls from a number of parties for borrowing to be banned, which was supported by the corresponding recommendation made in the Financial System Inquiry report.

MGD Insight

MGD Wealth most certainly welcomes the Government’s decision to reject a ban on borrowing by superannuation funds.

Any calls to wind back the ability for superannuation funds to borrow directly do not properly address the debate that needs to be had around superannuation and exposure to debt. Prohibiting superannuation funds from borrowing directly would not have prevented them from effectively leveraging their assets through other investment vehicles widely available in the market place.

The real issue with limited recourse borrowing arrangements through superannuation is how and why investors end up with them. These arrangements typically arise in connection with the purchase of real property and more often than not it is the particular property that leads to the borrowing, which may not be the most appropriate strategy taking into account all the relevant circumstances.

This is the tail wagging the dog and MGD’s long-held philosophy has always been that advice and strategy must come first, be appropriate in the circumstances and be delivered by suitably qualified professional advisers.

Going forward

In its response the Government noted that it will commission the Council of Financial Regulators and the Australian Taxation Office (ATO) to monitor leverage and risk in the superannuation system and report back to the Government after three years. The results of this report will be used to inform any consideration of whether changes to the borrowing regulations might be appropriate.

November 2015 Financial Clarity.

Disclaimer: This publication contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice.