Criticism of personal guarantees for LRBAs rebuked

Thinktank head of research Per Amundsen highlighted that using personal guarantees and limited recourse borrowing arrangements (LRBAs) to fund the acquisition of business premises is a ‘common practice’.

“The reasoning behind this practice is quite simple – the ultimate beneficiaries are those individuals whose guarantees are sought,” Mr Amundsen said.

“Guarantees used to support LRBAs are specifically provided for in the SIS Act and ensure that their recourse to other SMSF assets is no less limited than the original lender, and if funds are provided as a source of repayment these are then deemed to be contributions to the SMSF.”

Additionally, Mr Amundsen said recent criticism of LRBAs by the Council of Financial Regulators had concluded that they posed no systemic risk to the superannuation system, despite calling for a ban on the structure, and on the use of personal guarantees to support LRBAs.

“This is hardly surprising. The fact that real property investment represents only a relatively small proportion of total SMSF assets – 14.3 per cent as at March 2019 – compared with 56.7 per cent for cash, deposits and listed shares and trusts,” he said.

“Real property investment is broken down to 4.9 per cent residential and 9.4 per cent non-residential.”

The head of research stated that in 2019, non-residential real property made up 46 per cent of that supported by LRBAs and is known as ‘business real property’ when used ‘wholly and exclusively’ for business purposes.

“It’s recognised that owner-occupied business premises make up a large part of this type of funding and that SIS Act regulations were specifically designed to allow for them,” Mr Amundsen said.

“The benefits this offers to SME operators in planning and providing for their retirement cannot be questioned.”

He concluded: “The statistics published by the regulator continue to show that LRBAs remain at a level that is nowhere near problematic for SMSFs and that the real problems identified can and should be effectively dealt with through regulation and enforcement to eliminate any identified abuses.  

“The ATO’s efforts with respect to investment strategies and the late submission of annual returns is a great start to this, as are ASIC’s enforcement actions in recognition of failings by licensed advisers and others who owe a duty of care to trustees and members.”

[Related: APRA issues call to action to challenger banks]