Don't throw the SMSF out with the bathwater Part II - SMSFs Rock!
Two very good news stories put the lie to all the negative nonsense talked about SMSFs by industry and retail funds and their political fan clubs.
The first good news story for SMSFs was that Australia’s leading regulators have found that limited recourse borrowing arrangements (LRBAs) by SMSFs are “unlikely to pose systemic risks” to the financial system. In other words, there’s no problem with LRBAs.
This finding was handed down by The Council of Financial Regulators (CFR) and the Australian Taxation Office (ATO) after a review of potential risk posed by LRBAs where SMSFs borrow from a third-party lender to buy an asset which must be held in a separate trust, though investment returns from the asset go to the SMSF. If the fund defaults, the lender’s rights are limited to the asset held in the separate trust.
In 2014, the Financial System Inquiry said that prohibiting LRBAs would stop any potential for a build-up of risk in the superannuation system and more generally in the financial system.
The federal government then ordered a review into potential risks posed by LRBAs, which was completed by the CFR (comprising of the Australian Prudential Regulation Authority, the Australian Securities and Investments Commission, Australian Treasury, and the Reserve Bank of Australia) and the ATO.
Only 8.9 per cent of all SMSFs presently use an LRBA, using 5.2 per cent of the total of SMSF assets. With such a small proportion, the review noted that such arrangements are “unlikely to pose systemic risk to the financial system at this time”.
The Coalition government has said that it will not be making any changes to LRBAs and will instead request that the CFR and the ATO continue to monitor LRBAs in the superannuation system and report back again in three years.
Labor on the other hand want to ban LRBAs for no reason other than industry funds don’t like them because they can’t compete with them.
Although the review noted concern at funds with only highly-geared property in them and the potential for those funds to be exposed to market forces, those funds need to be seen against the backdrop of investment risk generally in our financial community, including the proliferation of so-called under-performing retail funds. There’s no free lunch when it comes to investment success. The best way to guard against problems is through consumer education.
The second good news story involved the latest Roy Morgan research showing that of a survey of 30,000 superannuation fund members, SMSFs led the way with just short of 75% of SMSF members saying they were satisfied with their super arrangements as opposed to only 62% of industry fund members. Retail fund members came in third.
Given that SMSF members run their own fund those who expressed dissatisfaction should do something about it, and that’s the strength of SMSFs – they can!
As we say, SMSFs aren’t for everyone but they’re a viable structure for you to hold your super.
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