At the weekend David Murray handed down his ‘Financial Systems Inquiry Report’, which included 44 recommendations, one of which was the prohibition on direct borrowing by superannuation funds.
So let’s clear up some abbreviations. You may have read some TLA’s (Three Letter Acronyms) and FLA’s (Four Letter Acronyms) in the news over the weekend so let’s quickly cover them now.
FSI – Financial Systems Inquiry
LRBA – Limited Recourse Borrowing Arrangement
APRA – Australian Prudential Regulation Authority
RBA – The Reserve Bank of Australia
SMSF – Self-Managed Super Fund
CBA – Commonwealth Bank of Australia
OMG – Oh My God…
What’s the big deal?
Using your SMSF to borrow money directly can be an extremely well leveraged strategy to supercharge your SMSF.
Without going into specifics, borrowing through your SMSF increases the amount of money you have exposed in the market. For example, if you have $1 million and invested to get a 10% return you will get a $100,000 return. However if you borrowed another $4 million on top you would have $5 million invested for a return of $500,000 so as long as the interest repayments on the $4 million were less than the additional $400,000 return then you’re in front.
So why do the G-Men want it banned?
Well first of all, it’s not the government that would like to see it gone, the FSI is an independent report chaired by former CEO of the CBA, David Murray. The Treasurer Joe Hockey states that this report poses questions to the government and not the other way around. Decisions are not expected to be made until March 2015 at the earliest.
As the report tackles SMSF’s it poses a warning that high levels of borrowing through SMSF’s could be detrimental to the financial system over time. Therefore, the recommendation from the report is that all LRBAs in superannuation funds should be banned.
Although these recommendations are just that – recommendations do not constitute law. If all the pundits are to be believed, most of these recommendations will be accepted and implemented.
Therefore if you’re interested in this strategy or would like to know if it’s something that you could do, contact us today.
If these changes go through what will happen to my LRBA
It is understood that all LRBAs implemented before this recommendation becomes law will be ‘grandfathered’ in, meaning they will carry on as always.
There are several approaches for this strategy and they can be very powerful, that being said they may not work for others. It is critical to get quality advice before taking action.
Contact us today to speak to one of our SMSF experts before this opportunity goes away for good.