Super Fund Lending up for review by ATO

The ATO has recently sent correspondence to SMSF trustees where most of the funds holdings are in the form of an asset with super fund borrowing attached to it (Limited Recourse Borrowing Arrangement or LRBA)

We know that this type of lending was heavily scrutinized in the recent Royal Commission into banking, with some major banks choosing not to lend in this manner as a result.

The ATO is specifically highlighting the SMSF "Investment Strategy". In the past this was seen as more of a 'box ticking' exercise. Now, however, I believe more attention should be paid to this potentially legally explosive document.

In my opinion, where an SMSF borrows money to invest in a business property where rent is paid by a related party business, this is in most cases a very good idea.

I myself have seen a lot of examples where this type of investment has lead to the main source of retirement income when the time comes to 'hang up the boots'. I would personally defend this arrangement vehemently.

I would question, however, other uses of "LRBA's". I think residential investments or other types of assets may come under further scrutiny.

CAANZ provided more commentary on this matter today:

The ATO notes that nearly a third, some 180,000, of the total population of SMSFs have invested 90% or more of their retirement savings in a single asset or asset class, those SMSFs contacted were selected based on a report to government in February by the Council of Financial Regulators and the ATO - the “Leverage and Risk in the Superannuation System” report.

This report highlighted concerns that less diversified SMSFs with LRBAs are exposed to asset concentration risk, which in the event of a fall in the asset’s price could lead to a significant loss in the value of the fund.

While a trustee can choose to invest 90% or more of their retirement savings in a single asset or asset class, concentration risk combined with leveraged borrowings, can expose the SMSF and its members to unnecessary risk if a significant investment fails.

I think its important to question the strength of your investment strategy in the light of these very recent developments, if you need further assistance please make contact with us today.