ATO worried about $12b in SMSF loans

Australian Financial Review 18 Jan 2019 8:37 PM

Joanna Mather

 SHOCKING PROOF OF BANKS PREDATORY LENDING!!!

EXCLUSIVE  The Tax Office has raised the alarm over the one-third of $39 billion in property loans by self-managed super funds that are guaranteed by assets outside super, such as the family home.

If the property market collapses, SMSF trustees in this situation will be hit by a double-whammy of losses to both their retirement savings and personal assets.

Regulators have been increasingly concerned about property speculation by SMSFs and Labor has pledged to ban what is known as limited recourse borrowing arrangements (LRBAs).

There are $42 billion worth of the loans and the vast majority are for property – $19.4 billion for residential real estate and $20.7 billion for commercial property.

ATO assistant commissioner Dana Fleming said the risk of property market contagion was exacerbated for SMSFs by the fact that 30 per cent of these borrowings involved a personal guarantee or other security.

That is, approval of the loan had been contingent on non-super assets being put up as a guarantee.

"We are concerned that despite the intention of LRBAs to limit recourse by lenders to the asset subject to the loan, 30 per cent of borrowers in 2017 still provided a personal guarantee or other security to the lender," Ms Fleming told AFR Weekend.

"If people are providing a personal guarantee and we had a massive property decline that caused the bank to foreclose on the loan, and selling the property didn't cover the loan, the personal guarantee is triggered.

"This means their other personal assets outside of super become at risk."

The ATO, which is responsible for regulating SMSFs, says at 5.6 per cent of total SMSF assets of $755 billion, these loans of $42.2 billion do not represent a systemic risk.

Main asset

But given the prevalence of property as the main asset purchased under limited recourse borrowings, the ATO is concerned about the risk to the retirement savings of individual SMSF trustees in the event of property decline.

"When you see an arrangement where an LRBA asset represents a really high proportion of the SMSF's total assets, that's a bit of a red flag," Ms Fleming said.

"Trustees are legally obliged ... to consider diversification and liquidity risk as part of their investment strategy and we strongly encourage that where an SMSF has an LRBA trustees ensure they adequately understand and mitigate the associated risks."

The ATO and the Australian Securities and Investments Commission have issued warnings about "property one-stop shops", which are in the business of convincing people to set up an SMSF to invest in property, collecting big fees on the way.

In December, for example, ASIC warned that spruikers promoting the illegal use of SMSFs were operating in the Coffs Harbour area.

"ATO has concerns with the number of funds entering into an LRBA on the basis of poor or conflicted advice," Ms Fleming said.

Key lenders, including big banks, have withdrawn from the SMSF lending market, which could limit the take-up of limited recourse borrowing.

The Financial System Inquiry (FSI) recommended a ban on direct borrowing by SMSFs to prevent an "unnecessary build-up of risk in the superannuation system and the financial system more broadly".

In 2015, as part of its response to the FSI, then treasurer Scott Morrison said he would ask the Council of Financial Regulators and ATO to look at the issue and report back within three years.