Associations form battlelines on SMSF borrowing

This would reduce unnecessary risk in the super system and fulfil its objective as a savings system for retirement rather than a wealth management scheme, according to the report.

MFAA chief executive Siobhan Hayden told The Adviser that the association would make a submission to the Financial System Inquiry in defence of SMSF borrowing.

"In most cases, SMSFs were set up to achieve a diversity of assets. Most are in the form of shares, money and real estate," Ms Hayden said.

"Without gearing, most funds will be forced to access real estate exposure through managed funds or restrict their portfolio to shares and money only."

Ms Hayden said one way to take risks out of SMSFs would be to reduce the maximum LVR from 80 per cent.

She also called for greater competition in the SMSF sector in order to drive down the interest rates on the limited-recourse loans used by SMSFs.

However, FBAA chief executive Peter White said his association is likely to make a submission to the Financial System Inquiry warning of the dangers of SMSFs.

Mr White said the FBAA had hired two specialists to investigate SMSF lending and then lead any lobbying efforts if their report confirms that the sector has gotten out of hand.

"If they've got research that confirms that the weighting of property in SMSFs is skewed far to one side, then we'll be saying that this shouldn't be allowed to happen," he told The Adviser.

"We can reach the regulators, we can reach government ministers, and we could tell them that they need to stop and look at this area because of a particular reason."

Mr White said he was not opposed to SMSFs, but that they appeared to be too heavily focused on property.

He added that innovative forms of lending that can seem good in theory can become distorted in practice, as occurred with low-doc lending and GRV (gross realisable value) lending.

"It could be the same with this kind of limited-liability borrowing – it was a good idea at the time, but it went left of centre and needs to get its horns pulled in," he said.

"SMSFs are all about having liquid assets when you retire so you can fund yourself. If it's all tied up in property, it's skewing the marketplace and people are winding up with portfolios that are predominantly based in real estate rather than cash or some form of greater liquidity."

The closing date for submissions to the Financial System Inquiry is 31 March.