SMSF loans on the rise: When you shouldn’t be borrowing

Borrowings by self-managed super funds have increased steadily from 1.1% a year in 2008 to 3.7% in 2012, according to the latest figures from the Australian Taxation Office.

But the SMSF Professionals Association of Australia (SPAA) says the borrowing is no cause for concern as the percentage still only amounts to 3.7% of the total SMSF asset pool.

Graeme Colley, director technical and professional standards of the SPAA, told SmartCompany although borrowing has increased it hardly suggests trustees are borrowing without giving due consideration.

“It’s only a very small amount of money out of the total $500 billion asset pool in SMSF, work we have done with banks and other lenders indicates the amount of loans is around $8 billion,” he says.  Concerns were raised last year by the Reserve Bank and ASIC about borrowings by SMSFs.

In the RBA’s Financial Stability Review last year, the bank said legislative changes have meant SMSFs can borrow money to invest in property – which has led to an increase in this type of activity being spruiked by advisors.

“The sector therefore represents a vehicle for potentially speculative demand for property that did not exist in the past.”

The risk, it said, is that these investments could influence property prices.

But Colley says the lending criteria placed on superannuation funds that borrow for limited recourse borrowing arrangements is more stringent than loans taken out by individuals for residential property and commercial property.

“The vast majority of borrowing is when the fund is in accumulation phase, which is the most appropriate time,” he says. 

Business owners who use borrowing through SMSFs to purchase business premises need to act carefully, Colley says. 

“There are certainly tax advantages to having your business premises in your super fund, but for residential property you need to be aware your returns may not be as good as for commercial property, and negative gearing near to retirement can be a real issue as it drains money from a super fund as you are subsidising the interest,” he says. 

“Make sure it is a good investment, just because it is in superannuation doesn’t give it any special features.”