The Financial System Inquiry has recommended significant changes to the superannuation system primarily aimed at disallowing superannuation funds to borrow directly using limited recourse borrowing arrangements (LRBA).
The FSI saw a potential risk to the financial system should the LRBA concessions continue. Though the borrowing is relatively small currently, it’s potential to grow could disrupt the financial system broadly, FSI said.
The findings from the inquiry reasoned potential risks to funds as one of their reasons for their recommendation. The review found that some lenders are charging higher interest rates because of higher risks associated to limited recourse lending and that it would require insistent personal guarantees from fund trustees. Since borrowing would focus on acquiring assets such as land and property, the fund’s diversification is reduced also making it more prone to risks.
Further, the Inquiry reiterated that the aim of superannuation was for it to be a savings fund for retirement, not a “wealth management vehicle.” It would also appear that the Inquiry is positioning itself to take a stance on super not having leverage.
The review also found that LRBA arrangements had been taken advantage of by some small and medium firms for their clients for tax purposes. Further, this advice had enabled these businesses to borrow money to improve business and increase financial success. Despite being of benefit to the members of the funds, these outcomes were outside the reviews stance that superannuation is purely a vehicle for retirement savings.
Additionally, since the money borrowed would be used to buy “assets” which are subject to market fluctuations, it also exposes the entire fund to accelerated gains and losses. Whilst this is a good outcome when market prices are increasing, it could be detrimental to members should markets turn around and begin falling.
If it is banned, SMEs will surely be affected, perhaps negatively. Experts say the LRBA never really gained track since it was introduced. The suggested ban may totally wipe the LRBA out.
The public consultation end on 31 March 2015 and it would appear the LRBA needs a lot of reforms for it to continue. PJT will follow any developments in this area and keep you posted.
If you need help with your super funds, contact our team here at PJT.
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PJT Accountants & Business Advisors Pty Ltd CAR Number 1243046 ABN 75 116 182 873 is a Corporate Authorised Representative of Merit Wealth Pty Ltd ABN 89 125 557 002, Australian Financial Services Licence Number 409361
Wayne Patten ARN 277883 is an Authorised Representative and Jodie Thompson ARN 277884, is a Limited Authorised Representative of Merit Wealth Pty Ltd ABN 89 125 557 002, Australian Financial Services Licence Number 409361