Stop SMSFs gambling with their super, says expert

Government urged to act in this year’s Budget.

Stop SMSF property punt: expert

There are about 600,000 self-managed super funds (SMSFs) in Australia, managing $696.7 billion in assets as at the end of the last financial year, according to the Australian Prudential Regulation Authority (APRA) and the Australian Taxation Office (ATO).

Many have invested in property.

The recent ‘correction’ on the stock market was a reminder not to put all your eggs in the same basket in relation to shares, and the same is true for property investors, especially the mum and dad and SMSF varieties. With the current low interest rates on offer, the temptation is there, but what goes up must come down – or what is low now, i.e. interest rates, must go higher.

The fact that so many SMSFs have borrowed to buy property, means retirement savings are at risk.

SMSF borrowing grew 50 times, from $497 million in June 2009 to $25.4 billion by June 2016, with more than 90 per cent of it related to property, according to Glen McCrea, chief policy officer at the Association of Superannuation Funds of Australia (ASFA).

“Growth by 5000 per cent over seven years is astonishing and, as custodians of the super system and the peak super industry group, the Association of Superannuation Funds of Australia considers this type of borrowing needs to stop now,” Mr McCrea said.

He noted that the number of SMSFs which were borrowing was rising. “Over the five years to 2016, SMSFs with borrowings increased from 4 per cent to 9 per cent. The average amount borrowed also increased by 4 per cent, from $356,000 to $372,000.

“Around 42,000 SMSFs currently borrow, mostly to buy property. More than half the SMSFs making use of limited recourse borrowing have more than 80 per cent of the fund’s total assets supported by such borrowing.”

The implications are clear, he wrote in a column in The Australian, if the property bubble bursts.

“The government could come under pressure to bail out SMSFs to prevent people losing retirement savings. There also would be an increase in expenditure on the Age Pension due to lower retirement savings.

“While property is a legitimate asset class for super funds, allowing self-managed funds to borrow to invest in property adds risk to the economy as well as directly to those funds.”

While super funds use diversification strategies to reduce risk, SMSFs that have borrowed to invest in property have few buffers.

A recent government inquiry called for a stop to this type of borrowing, a view backed by the ASFA.

“The latest ATO statistics and the state of the property market mean now is the time to act,” says Mr McCrea.

“Given the contractual arrangements currently in place and the difficulties associated with forced sales of more than $25 billion in assets, any changes to the law could be grandfathered, at the same time removing the ability to enter into such borrowing arrangements in the future.

“A sensible reform in this year’s budget would stop SMSFs gambling with their super.”

RELATED ARTICLES
    ?





    COMMENTS

    To make a comment, please register or login
    wombat
    1st Mar 2018
    11:15am
    Because of the property market cyclic nature, wouldn't it be more prudent to limit the % allowed to be borrowed against each asset. (say limit borrowings to perhaps 60% of asset value on the outset of any borrowing.) This would allow for fluctuations in the market and not force the sale of the asset in a down market. Bricks and mortar are still a good investment for funds over the long term. The governemnt also needs to stop changing the concessional contributions allowed - as this can seriously effect this strategy - particularly in the early years.
    Adrianus
    1st Mar 2018
    11:33am
    wombat, I think you'll find that is the case already. The reality is that banks would not enter into a LRB arrangement without the borrower having at least 40% equity. Can anyone show us a bank which has a more generous lending practice on LRB? What limits the loan to equity ratio is loan serviceability and recourse which is limited to the members balance. With this in mind why would a bank take undue risk?
    Old Geezer
    1st Mar 2018
    1:17pm
    I have heard that it is difficult to borrow any more than 50% for a non recourse loan for property in a SMSF. With a property in a SMSF you can't be seen to have any other assets in the SMSF at risk.

    However what many people do is set up a trust which buys the property and then sell units to the SMSF. The trust get a better interest rate and can borrow a lot more and can have other investors as well as the SMSF.
    Adrianus
    1st Mar 2018
    1:36pm
    That may be the case OG. It may be 50%. I don't see what the problem is unless SMSFs have substantial borrowings on residential property and the Federal Government decides to substantially reduce immigration, and the corporate tax cuts don't show an increase in ATO revenue etc etc.
    In order to get a LRB OG a bear trust MUST be established in order to keep the asset/s separate, however the trustee of the bear trust is the SMSF and therefor the bank would be in a position to have members' balances underwrite the debt. Regardless of who the borrower is, there is a margin for this higher risk lending not a discount.

    1st Mar 2018
    4:10pm
    Government should just lay off

    What next - legislate how many shares in each company on the NYSE and ASX, one can own in SMSF or industry super ???

    Idiots !!!
    tams
    1st Mar 2018
    5:12pm
    Most lenders in the market require 30% deposit, this minimises the effect of a downturn in property prices.
    It's interesting to see the negative comments coming from the financial planning industry.
    1) SMSF trustees are therefore doing investment strategies themselves and not using planners - historically we can see why (eg Storm)
    2) asset classes all have peaks and lows - why would property be a different asset than shares
    Adrianus
    1st Mar 2018
    5:22pm
    Correct tams, not hard to see why 96% of all Super Funds are SMSFs.
    Not a Bludger
    1st Mar 2018
    5:18pm
    Harbingers of doom and rentseekers like McCrea should butt out - their main objective is to get SMSFs and thier money under the control of ASFA and it's members.

    MY SMSF funds were earnt by me and are owned by me and how I choose, as Trustee, to deploy them (subject to the law) is my choice and my business

    As, indeed, is the choice of fund advisors - McCrae need not apply.
    MICK
    1st Mar 2018
    5:29pm
    It was not a good idea allowing people to borrow money to speculate. They've ok so far but when the music stops there will be forced sales and losses will occur. It is not fair that these folk should then lon on to the pension as they have used their tax minimisation scheme and lost.
    The system is broken.
    Anonymous
    1st Mar 2018
    6:42pm
    typical socialist nonsense

    who are you to dictate how people invest or borrow
    MICK
    1st Mar 2018
    7:06pm
    And who are to send people without any skills to the racetrack to lose their life savings? Rich man looking after his own interests. Bastard.
    Anonymous
    1st Mar 2018
    8:10pm
    not sending them anywhere Mick - its called free choice
    Fundamental human rights and freedom not something you believe in but like all good socialists you want to invoke your jihad on everyone else
    BTW - no need to use such language . Shame on you
    MICK
    2nd Mar 2018
    2:54am
    Read your own comment. Inflammatory. My original post was factual and people who cannot help themselves need to be protected from themselves.
    And then you go on to accuse me of jihad? Really.

    You spend your time denigrating socialists. My advice to you is to go to the US where the rich have plundered their workers to the extent people cannot afford to pay their bills on a full time job. If you, rich man, believe in the 'Free Market' then you are a part of the problem. There has to be a FAIR divide, something the current bunch of rats running the country have no stomach for as they hand everything to those who are already rich and who will buy another house, car, yacht, gold bars, etc. and do zip for the real economy.

    I have to say Raphael that your stereotype offends me because you have no humanity and it's all about....YOU.
    Anonymous
    2nd Mar 2018
    11:10am
    The US is the most successful country in history

    Why do you think it has $15 M illegal immigrants and they keep coming

    You’re a fool if you want to regulate and take away peoples rights

    Dirty socialists like you will be the downfall of this great country
    MICK
    2nd Mar 2018
    8:01pm
    The US is successful because those at the top have turned the rest of the population into servants and beggars, many of whom live in abject poverty.
    The only people who want to go to the US are generally the well to do (to avoid paying taxes) or those who live in third world countries where poverty is even worse.

    RIghts? What, the right to march into third world nations, strip gold mines of their wealth and leave a few peanuts for the country along the way. I would call that conquest and plundering.

    Sorry my humanity offends you. Sadly you are one of the bastards on the planet who cause poverty and believe you are entitled to do so. I have no time for you and your posts reek of despicable themes. The sort of human being you are.

    I may have a foot in the capitalist camp but am proud to understand that others have a right to exist. Shame on you Raphael. Better you were never born!
    MICK
    2nd Mar 2018
    8:07pm
    Oh yes....to respond to your last bit of BS the downfall of our country.

    The current coalition governments are destroying our country. They have more than doubled our debt. They have attacked working Australians and held wages close to zero for 10 years as the top end prospers like never before. They have given tax cuts to the wealthy who have no need of them. They have promoted tax shelters for the mega rich. And they continue to work away at turning workers into slaves by removing any lurks which made pathetic wages come closer to living wages.

    "Dirty socialist"? YOU SUPPORT ALL OF THE ABOVE. So what are you?
    Anonymous
    2nd Mar 2018
    10:17pm
    You’re response is so full of inaccuracies , lack of understanding of basic economics and downright lies . You should be shamed

    Lowering taxes increases economic growth and investment creating more jobs

    Wages are flat because economic growth is slow . Refer point above

    Government is too big hence our government spending is through the roof .BECAUSE people like you and the rest of the socialist scum advocate for socialist policies and more government intervention in what should be left to the market . Successive labor government and self interest groups as well as weak liberal governments have given in to the easy vote earning socialist policies at the expense of our long term future
    Blame your socialist idiots for wage stagnation and high debts
    The answer is to cut taxes and cut the size of government
    MICK
    2nd Mar 2018
    11:48pm
    You can run, make innuendos and lie Raphael but you can't hide.

    1. Wages are low because the economy id flat?

    So why has the top made huge profits in the last decade and 'organised' more and more money for itself? Nothing to do with the economy. The fact is the economy is flat because average Australians are not being given enough money to live on with prices rising faster than a rocket, so THEY HAVE NONE TO SPEND. Basic economics! But tell it to the greedy top end.

    2. Government spending is through the roof?

    Yes it is. From your side of politics. More than doubled the debt when Labor had reduced the deficits year on year. Nothing to do with socialists! Everything to do with mismanagement money for the mates in high places. It's been quite a few years in government and still the same Labor scapegoat is put forward. Pink batts anyone????

    3. Labor/self interest groups?

    Heard of a company called Adani lately. $1 billion of PUBLIC MONEY to fund a rail project the country has said no to again and again. Please explain about vested interest groups...and Adani is just the tip of this iceberg.

    4. Tax cuts for the wealthy?

    Ha, ha, ha. You astound me with your ignorance Raphael. The tax cuts are for the already rich on the lie of Trickle Down Economics. Google it. Works nowhere and this government has LIED to the public because the tax cuts are unashamedly meant for the wealthy....who will then increase their lavish lifestyle even more. Another holiday house in Saint Tropez Raphael?

    It is about time YOU told this community WHO you are and what your postcode is. Rose Bay? You make all the noises to that effect. Rich man looking after rich people's business. You sicken me in your contempt for average Australians who ask for little more than to meet their bills and have a very modest lifestyle. There should be laws against people like you. But then this is what brought on the French Revolution and I can only hope that history does repeat itself. Please go and look in the mirror.
    Adrianus
    3rd Mar 2018
    2:38pm
    Wonder you two haven't run into each other on the slopes at the lodge?
    Anonymous
    3rd Mar 2018
    5:22pm
    Mick is a dangerous IGNORANT FOOL. More likely he is a labor stooge who will spread lies just to get his mates voted

    I am a middle class Australian living in a very middle class suburb

    Socialist policies of the left have hurt the middle class most , the pension system for example helps the poor which is what it is designed to do but hurts the middle class and has no impact on the rich
    Big government and more and more money wasted on government bureaucracy said money from private investment into non productive activities of government, reducing private sector output of goods services which reduces employment and keeps wages down - ALL LABOR POLICIES
    Australians should wake up and demand out government reduce taxes and cut government spending
    Turnbull wants to cut taxes but for obvious selfish reasons - vote buying - Shorten lies to the public and will block the move
    MICK
    4th Mar 2018
    5:52am
    Your rantings are those of toffs and the wealthy.
    Your arguments do not have any logic and you persist in playing the man whilst avoiding playing the ball.
    You have my position in the above but all you ever rave on about is LABOR and SOCIALISM. That is a red herring my friend.
    Argue the facts. That is what I have done so pick the inaccuracies. You can't!
    Ignorant fool? Look in the mirror!

    To respond to the only bit of debate you have made Turnbull is a wealthy man with his assets in an offshore Tax Haven. His mates down at the club are likely likewise. If you had the intelligence to rub 2 sticks together you would join up the dots. Not much hope of that.
    Anonymous
    4th Mar 2018
    3:40pm
    Mick - it is you who plays the man with your insults.
    You simply parrot the politic of envy of your socialist party AND CHOOSE TO IGNORE PROVEN ECONOMIC THEORY

    The same economic theories of the right that has brought prosperity to billions

    Use your brains and think for a minute - Capitalism creates wealth and Socilaism destroys it. So the more you move your politic to the left , the more you blunt the power of capitalism and adverse impact wealth creation
    I will say no more - no point in discussing basic economics with a fool
    old frt
    2nd Mar 2018
    6:56am
    Comrade Mick as a very illustrious former British PM once said -Socialism only works until it runs out of other peoples money. What do you think all these rich people do with their money Mick, they reinvest their money creating more jobs and guess what, more money .Socialism dictates who gets the benefits (usually union thugs and the military ) and there are a lot more poor people in China than the US-why don't people protest about the conditions in China ,answer because socialist (communist ) don't sh#t in their own nests.The people who take all the risks deserve the rewards associated with taking those risks
    MICK
    2nd Mar 2018
    7:42am
    And the free market only works until the starving masses have a revolution to rid them of the stench at the top end of town.

    The problem with tripe like yours and Raphael is that the elites play the game of giving the poor just enough to not starve and they keep the rest. The mentality is 'we worked for it so it is ours'. The reality is that without average citizens to sustain their market wealthy people would be beggars.

    Instead of rolling out right wing propaganda complete with the usual union BS you might want to look at the corruption at the top, the place real money is allocated.

    Take risks? We all do. I've lost a motza on the share market but I have not lost my soul. You have.
    MICK
    2nd Mar 2018
    7:47am
    Sorry...I meant to respond to your attempts at legitimising Trickle Down BS.
    Rich people only invest if they see a return. Otherwise they buy houses, expensive cars, gold bars and holiday houses in all the best places on the planet. Please tell me about Trickle Down Economics. It only works in the propaganda from Herr Turnbull but has been shown for the rich man's scam wherever it has been tried. Google it. OK you already know that and are taking YLC readers for fools.
    ex PS
    5th Mar 2018
    9:09am
    A few numbers to put this discussion into perspective.

    World Poverty rates 2010. (2010 because one of these countries has not published the figures since 2010)

    China 2.8%

    India 29.8%

    USA 15.1%

    Russia 13.1%

    These are the figures offered by Index Mundi, they represent they people who were living under the poverty line in those countries. People can make up their own minds as to whether socialism can benefit the poor.
    Australia has a Trickle Up Economy, the poor work in order to make the rich richer.
    Adrianus
    5th Mar 2018
    4:21pm
    exPS, based on your analogy you and MICK should be packing your bags and getting on the next plane to China? Or should we follow China's lead and lower wages/ business overheads in order to bring down prices?
    old frt
    2nd Mar 2018
    7:54am
    It is good to see there is still a little bit of a greedy capitalist left in you Mick. So there is hope you will come back from the dark side -if you can a $ or 3 out of it . Happy share trading .
    MICK
    2nd Mar 2018
    6:44pm
    I partake in capitalism but I also recognise that it is obscen for me or any other people/group to own it all. That is more than greed. It is a sickness devoid of any humanity.
    Human beings live as a collective. We are not all the same. Some are always going to be better off than others and some will strive and work harder than others. Often it is opportunity which sets us apart.

    Where I have real issues is that some of us believe they have no responsibility to society and they should keep sometimes extreme wealth whilst others live in harsh poverty in a land of plenty, and worse still that this is how things should be. By all means call me a socialist if you choose, but I prefer to think I am a decent human being...but leave that up to others to debate.

    Cheers.
    ex PS
    5th Mar 2018
    8:20am
    Property investment is OK, as is the Share Market, but the only way to protect funds that can not be topped up by working, you have to spread your investments, that is just common sense.
    Bulla
    13th Oct 2018
    10:31am
    Could someone please provide link to government website where the details of entitlement of elected member of both federal and state governments including all those who enjoy /live on tax payer funded money.
    Thanks


    Join YOURLifeChoices, it’s free

    • Receive our daily enewsletter
    • Enter competitions
    • Comment on articles