Call for tighter rein on SMSF LRBAs

There should be more regulations on limited recourse borrowing arrangements (LRBAs) for negative gearing opportunities in self-managed super funds (SMSF), according to one accountant and academic.

Associate professor in the department of taxation at Curtin University, Helen Hodgson, said that while Australia could not do away with LRBAs, regulators should take a closer look at when they were appropriate and possibly deny them for negative gearing purposes in SMSFs.

"I think there has to be some more regulation, even though that's totally contrary to what the Government says about trying to reduce red tape," Hodgson said.

While tax benefits draw investors to negatively geared residential property, it is not conducive to the SMSF environment as the tax rate is much lower.

VIEW ALL

View all

Hodgson believes the amount SMSF investors can borrow should be no more than a certain proportion of the value of the property, or something similar.

"That's the only way I can see to stop the property going into negative equity or negative cash flow. I don't know how you would construct it, but I think you need to monitor negative cash flow," she said.

She feels there is a lack of awareness of requirements under the legislations for SMSFs.

For instance, once members enter the pension phase, the fund must be able to pay a pension, but if the only asset they have is property that has been heavily geared, they may fall short on cash to pay the pension.

"It's that sort of problem that I think is starting to emerge where SMSF trustees are fully aware and fully informed of what's a good tax investment in a personal context, but that's not always the same thing that's required under the SMSF context," Hodgson said.

She also wants a clear line drawn on the extent to which real estate agents can target SMSFs in their advertising.

"At what point are you giving financial advice and at what point are you not? That does have to be monitored."