SMSF assets swept up in housing boom

DIY super Duncan Hughes Self-managed superannuation funds are increasing the amount of debt they use to buy properties by nearly 80 per cent ayear, a sign of how the investment boom in housing is being driven in part by personal super funds.

The debt growth figures, published by the Australian Taxation Office, are five times the rate for listed shares and seven times that for cash and deposits.

Industry experts say continued growth at this rate, from a low base, has the potential to “threaten the stability” of self-managed super funds.

“Many in the industry bury their head in the sand and ignore any concerns around this growth in leverage,” said Claire Mackay, a principal of Quantum Financial Services, whose company was winner of this year’s SMSF Adviser of the Year. Ms Mackay is a member of the ATO’s Superannuation Industry Relationship Network, an industry consultative committee.

Revised figures from the Tax Office show there are estimated to be more than 534,000 self-managed funds with assets totalling about $557 billion.

Estimates for assets held by SMSFs using limited-recourse borrowing arrangements were revised threefold from $2.6 billion to $8.3 billion.

Based on the original Tax Office figures, that means an earlier fivefold increase in the value of limited-recourse borrowing arrangements for SMSFs between 2009 and 2014 has been revised to an increase of 17.5 times.

SMSFs can only use limited-recourse borrowing arrangements when purchasing property. If something goes wrong and the fund defaults, its other assets are not at risk. But lenders insist on personal guarantees outside the fund, such as the family home.

“If there was reason for concern before, there’s even more now,” Ms Mackay said.

Industry specialists are calling for a crackdown on property spruikers as well as advisers who encourage investors to leverage their super assets to buy properties, often concentrating all their retirement savings in a single asset If the past trend continues, limitedrecourse lending will increase over the next five years by more than 1600 per cent compared with 92 per cent for listed shares and 68 per cent for cash.

Even if the rate of increase falls by half, the growth in limited-recourse lending is likely to be significant Tax officials say less than 3 per cent of self-managed funds have limited-recourse borrowing arrangements.

Residential assets account for about $19.5 billion while non-residential assets – or commercial accounts used by business owners to buy their premises – account for $65 billion.

“Yes, this growth is from a low base, but a continual growth rate of this size has the potential to threaten the stability of the SMSF sector in the nottoo-distant future,” Ms Mackay said.

“We should not wait until it’s too late.”

The Financial System Inquiry raises the idea of restoring a ban on gearing with super because, even though current levels are low, they have the potential to rise rapidly and create problems in the system.

Cavendish Super, a major SMSF provider with more than $5 billion funds under administration, recommends the borrowing criteria be tightened, claiming that properly used leverage is beneficial, particularly for those needing to “fast-track” savings as they near retirement age.

Others, such as SMSF Owners’ Alliance executive director Duncan Fairweather, urge regulators to crack down on funds being used to buy a single, highly leveraged asset that is “vulnerable to changes in property values and rental markets”.

Key points ATOfiguresshow personal super funds are increasing debt for property at five times the rate for shares.

Industry wants crackdown on property spruikers.

Australian Financial Review, Australia, 13th Sep 2014


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