Denovan slams Murray proposal to scrap SMSF borrowing

Leading financial services lawyer Jon Denovan has slammed the FSI’s recommendation to ban direct borrowing by SMSFs.

Gadens partners Amber Warren and Jon Denovan suggested the report’s calls for increased competition in the superannuation sector are contradicted by its calls for borrowing in superannuation to be banned.

“Banning the ability for SMSFs to use leverage to build wealth inside the fund is likely to be a disincentive to the establishment of SMSFs, resulting in reduced competition and associated downward pressure on fees,” Ms Warren and Mr Denovan stated in an article.

The article also said that the misuse of limited recourse borrowing arrangements (LRBAs) could be addressed through imposing certain restrictions which do not amount to an outright ban.

“The risk of mis-selling could be addressed by imposing some reasonable controls on SMSF borrowing, such as requiring an SMSF’s equity in the real estate to comprise no more than 50 per cent of the fund’s assets and total borrowings (being limited to, say, 80 per cent),” the article stated.

“Another option to address concerns in relation to the misuse of LRBAs would be to remove the ability of SMSFs to borrow funds from related parties, which are often provided to fund up to 100 per cent of the purchase price of the property. Such loans account for the majority of the small percentage of LBRA-related contraventions identified by the ATO.”

Ms Warren and Mr Denovan said it would be appropriate for the government to defer its consideration of any changes to superannuation until 2020, when the Productivity Commission will conduct a “fuller review” into the superannuation sector.

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