Borrowing by self-managed superannuation funds is continuing to grow at almost twice the rate of total assets in SMSFs despite superannuation and regulatory reforms that have made the practice less attractive.
SMSFs had borrowing arrangements in place of $30.73 billion at the end of September 2017, according to the Australian Taxation Office. That was 13.46 per cent above the level at September 30, 2016 and outstripped the growth of SMSF assets overall of 7.7 per cent by almost twice. The same is true for the past three years.
But while the rate of growth may have slowed, the ratio of limited recourse borrowing arrangements (LRBAs) to total SMSF assets is continuing to climb. In September 2015, LRBAs accounted for 3.9 per cent of total SMSF assets while by September 2017 it had climbed to 4.5 per cent.
SMSFs must borrow using LRBAs which restrict lenders to taking only the asset borrowed against as security, meaning if there is a problem neither the owner nor the rest of the super fund assets can be called on to cover any shortfall.
Most of the borrowing by SMSFs goes into property and this is evidenced by the fact that over the three years surveyed here the relative position of property in SMSF portfolios has risen slightly to 16.8 per cent, despite a relative decline in 2016.
Borrowing by SMSFs is a contentious issue, with Labor pledging to ban it and the Turnbull government introducing new restrictions last year. These include an overall ban on non-concessional contributions to funds with more than $1.6 million and not allowing loans to be subtracted from SMSF asset base calculations.
Stephen Anthony, chief economist with Industry Super Australia, said the 200 per cent rise in LRBAs in recent years was “a very poor situation”.
“It’s a time bomb because it helps fuel the property boom by boosting the demand side not the supply side. Property booms usually end with property busts which can be very ugly and will be made worse by SMSFs owned by a small number of highly indebted individuals.”
Nicki Hutley, a partner at Deloitte Access Economics, said there were dangers in the run-up in SMSF borrowings.
“It takes a lot of skill to be an investor and people don’t necessarily have the expertise to run their own fund,” she said.
“SMSFs should have a balanced portfolio but if people are creating a highly geared fund by buying real estate at the top of the market recently then that could be a problem.”
Tim McKay, an adviser with The Independent Advisor Group, said while LRBAs were a “quite small part of total SMSF assets they are a niche that has grown significantly”.
“They should be a small part of an individual SMSF asset base or they represent a significant risk,” he said.
The banks have cracked down on SMSF borrowing in recent years with loan to valuation rations now set at 70 per cent while on home mortgages it is 80 per cent. And they are increasingly calling for SMSF owners to provide personal guarantees to call on if things turn bad.
That would bring increased pain for SMSF owners if there were a property market bust.
Interest rates on SMSF loans are also significantly higher than for conventional investor loans.
Mr McKay said that while LRBAs were still growing he expected the growth to taper in coming years as new rules introduced in 2017 increasingly bite.
ISA data showed that SMSFs with assets over $2 million earned, on average, a healthy 4 per cent per cent but those under $500,000 earned shocking returns ranging from zero for funds between $200,000 and $500,000, to negative 16.7 per cent for those below $50,000.