SMSF LRBAs under the radar

A new set of guidelines is being put in place for limited recourse borrowing arrangements (LRBAs) after the Financial Services Inquiry attacked the fact that a 'tiny rogue minority’ has been spruiking this borrowing provision. 

The SMSF Professionals’ Association of Australia (SPAA) has set up two separate guidelines on disclosure in lending and advice, with the National Australia Bank (NAB) agreeing to comply with it. 

SPAA CEO Andrea Slattery said the guidelines aim to foster self-regulation in the SMSF lending sector both by lenders and advisers. 

“The lenders’ guidelines are intended to establish banking industry standards that can complement individual LRBA Credit Policy and Practices regarding LRBA lending to SMSFs,” Slattery said.   

Under the guidelines lenders have to recommend to the SMSF trustee that they get specific, appropriate SMSF, financial and legal advice on their SMSF entering into an LRBA. 

At the same time they should point out their own limited role and responsibilities in this process. 

Lenders should also provide the facts on what is involved in an LRBA including what it is, the advantages and risks, how it is established and maintained, what happens on repayment of an LRBA, what happens in case LRBAs default, and SMSF compliance. 

The guidelines also states advisors should advise on the appropriateness of LRBA for the SMSF, considering their needs and the fund’s circumstances. 

Advisors should also discuss with trustees the permitted use of LRBAs under the Superannuation Industry (Supervision) Act 1993 law. 

Advisors should consider if a borrowing strategy is right for the trustee, investment timeframes, expanded investment opportunities, portfolio diversification opportunities, SIS law contravention risks, the need for adequate insurance, and interest rate risk.  

“The advice guidelines are proposed to create a best practice standard of advice that should be provided to SMSF trustees considering the use of LRBAs if they elect to seek personal advice,” Slattery said. 

The guidelines note, however, that while advice is strongly recommended, the decision to get advice on LRBA is up to the SMSF trustee in the end.