Government Rules Out Banning SMSF Property Investment

The Coalition government has quelled concerns that it will ban property investment via self-managed superannuation funds, after a three-year review found that the arrangements are unlikely to “pose systemic risk” to financial stability.

Treasurer Josh Frydenberg said that the government will not make any changes to limited recourse borrowing arrangements, which allows self-managed superannuation funds to take out a loan for the purchase of an asset.

Limited recourse borrowing arrangements — or LRBAs — have been a matter of contention since they were introduced in 2007; if a SMSF loan defaults, limited-recourse borrowing arrangements mean a lender’s rights are limited to the value of the asset lent against.

In an announcement on Friday, the treasurer pointed out that only about 8.9 per cent of SMSFs are carried out under limited recourse borrowing arrangements and of that only 5.2 per cent hold SMSF assets.

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The report by the Council of Financial Regulators and the ATO pointed out that property investment by SMSFs can potentially exacerbate property price cycles by increasing demand.

“Using a LRBA to purchase property increases leverage in the SMSFs’ portfolio,” the report noted.

“Leveraged property assets are estimated to have grown by around $14 billion between 2013 and 2018, driving an increase in SMSFs’ overall property exposure.”

The report pointed out that SMSFs make up a “small share” of the overall demand for housing.

Adverse movements in the property market have prompted the big four to stop SMSF lending entirely — with Macquarie Bank the latest lender to axe borrowing for self-managed super funds, issuing a note to brokers it intended to so from April 30.

Macquarie was the last of the majors to pull out of the SMSF lending market, following AMP and Commonwealth in 2018, amid rising regulatory concerns about lending to SMSFs in a property downturn.

A recent Productivity Commission report noted that “active monitoring” and public reporting of self-managed superannuation funds using LRBAs is warranted to ensure that the lending does not “have the potential to generate systemic risks in the future”.

The treasurer said that the government had already taken a number of steps to tighten regulation to reduce the risks of LRBAs.

The reforms include tightened lending standards, borrowers’ protection reforms and the formation of a financial adviser standards authority to improve accreditation.