From time to time we read of reports about superannuation funds, and particularly self-managed super funds (SMSF), borrowing money for investment purposes. The debate has become quite emotional with at least one side of the debate suggesting that SMSFs borrowing to purchase residential property is contributing the housing affordability crisis in Australia.
Whether SMSFs should be able to borrow for investing is a vexed question and there will always be passionate debate from both sides of the argument.
Just to recap, amendments to superannuation laws back in 2007 allowed super funds to borrow for investment purposes. However, the legislation is somewhat convoluted in terms of the way in which super funds must structure their borrowings to comply with the law. Without going into detail around the structuring and the history, the loan a super fund can obtain is known as a limited recourse borrowing arrangement (LRBA).
In the 10 years since LRBAs were allowed, the law and the interpretation of that law, has changed on a number of occasions. But again, that is detail we won’t delve into on this occasion.
The law, as it currently stands, allows super funds to borrow money under a LRBA for the purposes of acquiring an asset – in other words, an investment. In the greater part LRBAs have been used by super funds to purchase residential and commercial property.
But, has the ability of super funds to purchase real estate, and particularly residential real estate, had any significant impact on the affordability of residential housing? Some would certainly argue that it has.
However, I am not so sure.
Certainly, super funds entering into the housing market has increased demand for properties but even today, the amount of residential property held by SMSFs is miniscule – less than half a house in a neighbourhood of 100 homes!
However, if we take this one step further, not all of the residential housing owned by SMSFs has been purchased with borrowed money. Information from the SMSF Association reveals that around $12bn. has been used by SMSFs to purchase residential real estate. To put that into context, borrowings by SMSFs to purchase residential real estate accounts for less than half of the value of all residential real estate owned by SMSFs.
From this, I think it is difficult to suggest that SMSFs borrowing money to purchase residential real estate is a significant contributor to the housing affordability crisis in Australia today.
The Federal Opposition has gone on the public record and stated they believe that SMSFs should be banned from borrowing for investment purposes. Sadly, I think that is a case of ‘throwing the baby out with the bath water’. It is not going to fix the housing affordability crisis!
Even the Government has announced plans to tinker with LRBAs. At the time of writing this article, a draft bill has been released for comment. Their proposed change will basically mean the gross value of the property, rather than the value after deducting the amount of any outstanding loan, will be used to determine how much a super fund member can hold in a pension account, and whether or not they are to make future non-concessional contributions to their fund. It is all quite technical and at the current time, has not been legislated. Even if the changes are legislated, they will only apply to new LRBAs.
Whether a superannuation fund should be able to borrow for investment purposes is very individual. In some cases, a SMSF borrowing to purchase either residential or commercial property has been most advantageous for the fund members. In other situations, there are stories of desperation and devastation.
There will be occasions where borrowing to invest makes all the sense in the world, and other occasions where borrowings should be avoided at all costs. SMSFs borrowing to invest not a case of ‘one size fits all’.
What are your thoughts on this contentious topic, feel free to share your ideas in the comments!