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Abolishing LRBAs could ‘unjustifiably disadvantage’ SMEs

Small businesses would be “unjustifiably disadvantaged” if limited recourse borrowing arrangements were to be abolished, the CEO of a commercial property lender has warned.

The chief executive of Thinktank, Jonathan Street, has reiterated concerns around the potential ban on limited recourse borrowing arrangements (LRBAs), which the Australian Labor Party (ALP) pledged to do should it be elected in May, saying that it would adversely impact small businesses who use LRBAs as part of a broader investment or business strategy.

According to Mr Street, such a move will “severely and unjustifiably disadvantage” small business owners looking to “legitimately synchronise their business operations with their long-term retirement income strategies”.

In particular, the CEO noted that abolishing LRBAs could limit a small business owners’ ability to invest in particular properties, such as their own business real property (BRP).

He acknowledged that opponents of LRBAs have been using the Council of Financial Regulators (CFR) and the Australian Taxation Office’s (ATO) recent report, titled Leverage and Risk in the Superannuation System, to justify banning the debt instrument.


Mr Street lamented that while the report found that such a move would be “detrimental” to some self-managed super fund (SMSF) trustees, it nevertheless concluded that the regulators’ preferred option is to eradicate LRBAs, and, if not accepted by government, to abolish the use of personal guarantees.

Specifically, the report states: “Borrowing to purchase an asset [that] can generate strong returns, for example, a property with an established rental yield, allows [an] SMSF member to increase their self-sufficiency in retirement, provided they properly manage the concentration risks noted above and have sufficient savings to manage ongoing maintenance and any detrimental changes in property values or the rental market in the future.”

The report also rarely mentioned BRPs, despite business owner-occupied premises accounting for a large part of the demand for LRBAs, according to Mr Street.

“While the one-stop shop marketing of LRBAs for small residential units and off-the-plan pre-sales [are] far less common, [they] are mentioned far more frequently [in the CFR report],” the Thinktank CEO added.

As such, Mr Street believes the report’s conclusion “[flies] in the face of [the CFR’s] own evidence”.

While the CFR and the ATO ultimately concluded that SMSF LRBAs are “unlikely to pose systemic risks”, they raised concern over the “prevalence of property as the main asset purchased” under an LRBA, noting that the purchase of property as the main asset is “most commonly by low-balance SMSFs (those under $500,000)”, which have “little investment diversification and high [loan-to-value ratios]”.

Mr Street acknowledged that there have been many cases where the interests and motivations behind LRBA finance applications might have been “inherently conflicted”, investment strategies were “negligent”, and the types of property used as security were “fundamentally ill-suited to small-balance SMSFs, including concentrations of off-the-plan, inner-city high-rise apartments”.

However, to abolish LRBAs “fails the many advisers, lenders and investors who abide by the rules and make sound investment choices regarding LRBAs”, according to the Thinktank CEO.

“The use of LRBAs for potentially conflicted residential property acquisitions have long been recognised as undesirable in the industry, but even when notably targeted by [the Australian Securities and Investments Commission] in its recent report on financial advice, little action seems to have been taken to remedy the situation, such as implementing mechanisms to ensure statements of advice meet expected standards and all parties to the transaction are impartial,” he said.

As such, Thinktank’s view is that the “glaring solution lies very much in the prudent enforcement of the existing legislation regarding the LRBAs”, which Mr Street noted is what commissioner Kenneth Hayne recommended in his royal commission final report.

“By doing so, it could clean up that element of the market where LRBAs may be an ill-advised investment and allow the market to continue operating for those small business owners, in particular,  who clearly benefit from this debt instrument being available to them,” the CEO said.

Since December 2013, Thinktank claims to have financed more than 300 commercial property-secured LRBAs, accounting for $165 million of its loan book.

“Importantly, we have had practically zero arrears history. Only one loan has ever defaulted in the wake of a cyclone (and that loan did not incur a loss), and 81 per cent are currently repaying principal and interest in alignment with their retirement targets,” Mr Street previously noted.

The specialist lender had confirmed its entry into the residential SMSF market in March, after six years of providing SMSF LRBAs secured only by commercial property. The entry followed a number of exits from the SMSF residential market by lenders such as CBA, NAB, Westpac, AMP and Macquarie.

The Thinktank CEO admitted in March that, thanks to the outgoing banks, there is an “even greater market opportunity” for a “pragmatic and experienced lender to assist well-informed, well-advised borrowers with their own long-term wealth creation plans”.

Mr Street sees the potential ban on LRBAs as the only “foreseeable wrinkle” in the lender’s growth path.

Thinktank recently surpassed the $1 billion mark in loans under management.

[Related: Thinktank enters residential SMSF market as banks exit]

Abolishing LRBAs could ‘unjustifiably disadvantage’ SMEs

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