SMSF and limited resource borrowing – a warning
At times in our financial lives borrowing to invest makes good sense. For the majority of people when financing a new house borrowing is more out of necessity than a decision to leverage for wealth creation reasons.
Sensible levels of borrowing are an accepted part of business and investment strategies and in the financial planning and accounting worlds are intertwined with tax planning.
But when it comes to your savings for retirement does borrowing - with the inbuilt risk that comes with leverage - make sense?
This is a particular issue for people saving for retirement via a self-managed super fund because limited recourse borrowing is a real option and one that is increasingly being marketed aggressively alongside property development schemes.
Certainly the David Murray-chaired Financial System Inquiry did not think borrowing via SMSFs was appropriate and has recommended to the Federal Government that it be banned. The government has yet to announce its response.
The FSI recommendation though flows from concerns that increasing levels of limited recourse borrowing will, over time, increase risk in the broader financial system. Certainly the use of leverage, while still a small part of the SMSF asset pool, has been growing strongly in recent years with the amount of funds borrowed increasing from $497 million in June 2009 to $8.7 billion in June 2014 according to the final FSI report.
But the issue raised by the FSI is a different question to whether it makes sense for you and your SMSF.
Vanguard recently released the Investment Trends' latest SMSF Investor Trends report. Based on about 3900 investor responses, the research showed that for the first time in five years the interest in borrowing within an SMSF was losing favour.
No doubt the considerable amount of publicity flowing from the Murray Inquiry recommendation and the focus on limited recourse borrowing arrangements by ASIC has been an influenced SMSF trustees' attitudes to using borrowing within their super fund.
Asked what the barriers were to borrowing within their SMSF, 29% of investors felt borrowing within their SMSF was inappropriate (29%) while 15% said borrowing inside the SMSF was too risky and 11% pointed to the legislative uncertainty.
The question of whether borrowing within an SMSF is appropriate is a complex (and costly) discussion and anyone considering it should seek financial planning and accounting advice from an SMSF specialist.
ASIC has been proactively warning investors about property spruikers trying to lure investors into direct property investments by getting them to set up an SMSF, roll their existing superannuation balances into it and then put borrowing arrangements in place to fund the property purchase.
Clearly those type of arrangements and sales techniques are a cause for concern.
While the Murray Inquiry was primarily concerned about introducing risk into the broader financial system for the individual investor the risk is much more direct - the risk of destroying rather than creating wealth to fund your retirement.
By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia
24 August 2015
Latest Newsletters
Hot Issues
- Aged care report goes to the heart of Australia’s tax debate
- Removed super no longer protected from creditors: court
- ATO investigating 16.5k SMSFs over valuation compliance
- The 2025 Financial Year Tax & Super Changes You Need to Know!
- Investment and economic outlook, March 2024
- The compounding benefits from reinvesting dividends
- Three things to consider when switching your super
- Oldest Buildings in the World.
- Illegal access nets $637 million
- Trustee decisions are at their own discretion: expert
- Regular reviews and safekeeping of documents vital: expert
- Latest stats back up research into SMSF longevity and returns: educator
- Investment and economic outlook, February 2024
- Planning financially for a career break
- Could your SMSF do with more diversification?
- Countries producing the most solar power by gigawatt hours
- Labor tweaks stage 3 tax cuts to make room for ‘middle Australia’
- Quarterly reporting regime means communication now paramount: expert
- Plan now to take advantage of 5-year carry forward rule: expert
- Why investors are firmly focused on interest rates
- Super literacy low for cash-strapped
- Four timeless principles for investing success
- Investment and economic outlook, January 2024
- Wheat Production by Country
- Time to start planning for stage 3 tax cuts: technical manager
Article archive
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
October - December 2015 archive
- Should we expect stormy skies or sunshine in 2016?
- Merry Christmas and Happy New Year 2015
- There's no one-size-fits-all retirement income
- Market Update – 30th November 2015
- Why the ATO’s new powers make SMSF compliance more important than ever
- 'Unretiring' retirees
- The detrimental impact of poor SMSF record-keeping
- Counting the cost of 'grey' divorce
- Combining total-return investing with realistic investment expectations
- Market Update – 31st October 2015
- Another telling reminder for SMSF trustees
- Death in paradise – or your SMSF
- Elderly exploited for assets
- Intergenerational challenges for retirement saving
- Death benefits – navigating the minefield
- Strategy over structure
- Market Update – 3oth September 2015
- SMSF and limited resource borrowing – a warning
- External partnerships and the in-house asset rules
- Take a closer look at SMSF age demographics