It’s time to ban SMSF leverage

ScreenHunter_4716 Oct. 31 08.45

By Leith van Onselen

The AFR is reporting today that self managed superannuation funds (SMSFs) are gearing into property at an increasing rate, with the amount of debt held in limited-recourse mortgages more than tripling from “$2.5 billion at the end of June 2012 to $8.7 billion at the end of June 2014”.

A few weeks back, former Treasurer, Prime Minister, and architect of Australia’s compulsory superannuation system, Paul Keating, called for curbs on SMSFs using leverage to invest in Australian residential property, arguing that it “is making it nearly impossible for younger people, owner-occupiers, to afford to house themselves” and arguing that “we can’t persist with the position where our children cannot afford to house themselves and that is where we are now”.

Keating’s call for curbs echoed those of the draft report of the Murray Inquiry into Australia’s financial system, which in July warned of the embryonic growth of SMSF property leverage:

The use of leverage in superannuation funds to finance asset purchases is embryonic but growing. The proportion of SMSFs with borrowings increased from 1.1 per cent in 2008 to 3.7 per cent in 2012. The average amount borrowed increased over this period from $122,000 to $357,000. Total borrowings in 2012 were over $6.2 billion. More recently, Investment Trends research found that, over the year to April 2014, the number of SMSFs using geared products increased by more than 11 per cent to 38,000…

If allowed to continue, growth in direct leverage by superannuation funds, although embryonic, may create vulnerabilities for the superannuation and financial systems.

The Murray draft report also recommended removing the ability of super funds to leverage into investments:

The general prohibition on borrowing in superannuation was introduced for sound reasons. Although levels of direct leverage in the superannuation sector are low, they are increasing. Removing direct leverage in superannuation is consistent with the concept that superannuation tax concessions should apply to funds that have been saved and not borrowed. There are ample opportunities — and tax benefits — for individuals to borrow outside superannuation.

As argued previously, allowing super funds to leverage into property and other investments was one of the biggest blunders of the Howard Government. In permitting leveraged investment, the Coalition effectively turned super from being a retirement savings system into a speculative vehicle, in turn dramatically increasing the riskiness of Australia’s retirement savings and financial system, and further inflating Australian house prices.

As a consequence, cases have already emerged whereby SMSFs have collapsed due to leveraged property deals that have gone wrong. In July, The AFR reported several cases of collapses of over-leveraged ­SMSF schemes that invested in off-the-plan apartments, fueled by generous incentives offered on apartment sales by developers to unauthorised and unqualified financial and property advisers that recommend their projects. Similar reports have emerged showing that some SMSF investors had lost up to three quarters of their investment in dodgy property deals over the past two years, again fueled by “offers of up to 20 per cent commissions, top-up bonuses and other special cash incentives to encourage the super investors to buy off-the-plan apartments”.

Given some SMSFs have already lost large sums during a period of strong property price growth, it stands to reason that investors could face heavy losses once price appreciation slows or values fall.

It is a disaster waiting to happen and highlights the need for leveraged investment in superannuation to once again be banned.

[email protected]

Leith van Onselen


  1. What good is a “retirement savings system” that can’t keep up with the returns of debt driven strategies outside of super?

    Question for those that believe SMSFs should be banned from leverage/debt related investment: Do you think the same rules should apply to super funds?

    • Retirement savings need to be stable, not world-beating. Government should work to limit inflation, so stable performance is enough to provide a comfortable lifestyle.

      Gearing prohibition already applies in the same way to large funds. Large funds don’t need gearing, anyway – they typically face the problem of finding places to park their cash balances which just keep growing and growing from contributions.

      • So then perhaps SMSFs shouldn’t be allowed at all. Individuals could just as easily blow up their savings with penny stocks, illiquid art or some other high risk / volatile investments.

    • Some people believe in the right of the individual to make choices that suit them, and some people have a strong affiliation with the nanny state that wants no one to have any choices apart from Vanilla Milk, especially if they fear that drinking Chocolate Milk will give someone else an advantage over them.

      It’s just the way it is BB.

      • “What good is a “retirement savings system” that can’t keep up with the returns of debt driven strategies outside of super?”

        Why should we compare the “retirement savings system” to a leveraged strategy outside super? It should be deliberately low-risk.

        “Question for those that believe SMSFs should be banned from leverage/debt related investment: Do you think the same rules should apply to super funds?”

        Yes, absolutely. I think any leveraged strategy should be banned for money that was given preferential tax treatment on the basis that it will be used to save for retirement.

        “Some people believe in the right of the individual to make choices that suit them, and some people have a strong affiliation with the nanny state that wants no one to have any choices apart from Vanilla Milk, especially if they fear that drinking Chocolate Milk will give someone else an advantage over them.”

        And some people believe that if you are being given a generous tax break to help you save for your retirement then you should be obliged to invest the money conservatively and without leverage.

  2. GunnamattaMEMBER

    What I have been told, by a mate who has recently retired and sold his accounting firm/financial advisory (and has been seeing out a handover/transition period) is that most people with an asset base who go to seek financial advice are being told some constant themes.

    – an SMSF is a means to reduce taxation on Super and that can maximise the payout at the end.

    – real estate is seen/encouraged by many/most as a viable ‘investment’ to have inside an SMSF – particularly given the perception of risk in other asset classes.

    – negative gearing is seen as a means of maximising the upside potential of the asset class (property only goes one way is what the public think) while enabling leverage and reducing tax on the outlays involved now.

    What I was told was that all of the big banks will help people do it, but that one in particular seems more forward on pushing it. NG inside an SMSF basically involves a non recourse loan.

    The bloke who told me this said he knows that at a macro level lots of people doing this is utterly insane, that it massively increases financial system and future welfare risk, he agrees that it completely distorts the economy and is profoundly unfair at a generational level……but he said to me that ultimately as a financial advisory type he needed to strike a balance between what he thought was advisable and what the customer thought was achievable, and that there was a flood of customers who thought NGing inside an SMSF (in particular) and property speculation (in all its myriad of forms) was the only game out there for them.

      • Let’s see – a financial planner meets a client with $100K in super.

        He can put together a portfolio of shares and managed funds, maybe charge $1000 up front and $500 per year going forward, after they complete an 80 page disclosure document.

        Or he can leverage into a $500K apartment and get paid $25,000 in commission and a $2000 trail on the mortgage. Accounting fees follow from there.

        And, clients are totally obsessed with property – so it is actually an easier sale – without the burden of 80 pages of compliance documentation.

        What do people think is going to happen?

        As usual, ASIC and Co have their heads firmly planted up their bums

        The other scam is buying a renovator’s delight and sneakily spending money on the asset – getting around the superannuation contributions restrictions before selling in pension phase for 0% tax.

      • 8888 is right. It’s also why tax accountants push SMSF’s for anyone with over 100k. They want to increase the fees they take in as small/mid sized accounting practices are being squeezed. Unless you need the ultimate flexibilioty a SMSF offers it shouldn’t be on the table as an option unless you have 500K in super, or close to this and will be adding alot fast.

      • “Just heard exactly that yesterday from my new tax agent who works with financial advisors”

        BEWARE any Accountancy practice that “works with” financial advisors!

        From personal experience you will PAY more & get $shit advice .Having been in the Advisory Business I avoided ongoing unnecessarily expensive fees for my own SMSF by seeking out an Accountancy firm NOT locked into Financial Advisors -(So called)

    • We know it must be mammoth, the RBA wouldn’t have completely contradicted its ‘housing will save us’ calls from 12 months ago, with the current jawboning against excessive property leverage and investor loans. In two years time, we’ll be talking about this as another failed tax minimisation, get rich quick scheme like the many that have come before it. Unfortunately, the lemmings will have been slaughtered whilst the FIRE types prosper on both sides of the trade.

      The sheer lack of independent thought and want for following the masses is not surprising. They need a dose of this;

    • I’m an experienced financial planner in Sydney, and obviously I know a lot of other planners.

      I don’t know one single planner….that’s right, not one…who recommends gearing into property through an SMSF to clients, so I don’t know how you can suggest “most people”.

      Negative gearing is BS, and SMSF’s are BS for most people.

      The important link in your story is accountants….they love both for obvious reasons.

      • GunnamattaMEMBER


        Well actually I am glad to hear that. But the person who told me what I related above certainly did say that straight out – he knows my views on Australia’s obsession with RE speculation, indeed he himself is openly scathing about the current economic policy settings of Australia, and the way the taxation system is structured, and the propspects of future generations of Australians having to dig themselves out of a large economic hole. Indeed it was someone we both knew (now departed) who put me onto the foreign buyers of Australian real estate issue as well.

        But that is what he related and I believe him. A lot of people have the view that levering up to speculate on real estate while minimising tax is some form of path to riches, and a degree of righteousness to go with it.

      • Actually it’s accountants who say that. Currently they can provide financial advise for smsf without a financial license. And as we all know, accountants always advise NG properties, because they are judged on their ability to reduce tax.

        After 2016 they would require a limited financial license to provide financial advice for smsf, and to get the limited license, they would require the same training as financial planners. Hopefully by then, they would have the same appreciation for risk as @rohanmcp.

      • eactly rohan. We are talking people out of property, unless they are a doctor and want their rooms in an SMSF etc.

      • @JC

        Unfortunately it only takes one accountant to undo all your hard work. Because they are currently able to advise all aspects of smsf.

        Guess for you, 2016 couldn’t come fast enough.

      • Bull Shit is rife re this discussion – amazing that it passes any measure of scrutiny:
        BS No 1
        “8888 is right. It’s also why tax accountants push SMSF’s for anyone with over 100k. They want to increase the fees they take in as small/mid sized accounting practices are being squeezed. Unless you need the ultimate flexibilioty a SMSF offers it shouldn’t be on the table as an option unless you have 500K in super, or close to this and will be adding a lot fast”

        Actually with cost cutting the way it is today $50K would be enough to start a Fund IF someone had firm ideas on where they wanted to invest. (NO BS about “asset allocation”) The cost to start a fund with either private or Corporate Trustee should be under $500 as ONE OFF cost. Then if simple investments ongoing Accountancy & Audit fees could be well under $1500 PA at least until Fund got a lot bigger.That’s 3% PA
        which is not a lot of cost initially to run your own destiny !

        BS No 2 – -“I’m an experienced financial planner in Sydney, and obviously I know a lot of other planners”
        “Negative gearing is BS, and SMSF’s are BS for most people”

        Agree with NG is BS .
        Saying that SMSF’s are BS for most people is the rhetoric taught TO the Financial Planners & AMPs of this World! The vested interest is so bloody obvious I’m impressed you actually wrote that. Ha ha

    • I am a financial adviser.

      Some common scenarios:

      – Client hubbie and wife walk in wanting an investment property, even though they still owe 400K on their own house.
      – Every second client wants to borrow money and buy a property in their SMSF.

      We pretty much talk them out of it.

      I am dealing with clients atm who are retired and have a property in super and about 200k cash. They now want to sell the existing property to finance the building of another larger property as they believe this will boost their retirement income (the are already retired).

      So rather than commence an ABP and liquidae the current property, and have close to a million dollars of investable capital to fund their retirement, their idea is to instead use all of the money to build and flip another property. To say i get exasperated is a hell of an understatement.

      • You can thank accountants and real estate agents for that. Though accountants are currently legally allowed to give advice like that, even though they are not trained to. Real estate sales people, on the other hand…

      • Do you know how successful you are talking them out of it, e.g. do you ever have clients that you believe came to their senses showing up wanting advice on the next additions to their portfolio, or looking for a way out of the mess they themselves in?

        Just curious.

      • @StatSailor
        Unfortunately, these days, when asked who would you trust more between an accountant or financial planner, most people trust accountants.

        Also when presented with two plans, one is a portfolio of managed fund for smsf from a financial planner, the other a NG property for smsf from an accountant. The client will probably trust the NG property more because of the managed fund trailing commission debacle and financial planners don’t legally have to represent the clients best interests.

      • I suspect that part of the issue is the deeply held belief that ‘tax minimisation’ is the highest goal of any endeavour, and that’s why people see accountants who help minimise their reportable income. Personally I”ve found that larger tax bills have always come with larger amounts of money in my bank account, so tax minimisation has seemed all that attractive.

      • The other thing is account is regarded as a respected member of society, after all, they have the right to certify photocopied documents. But they don’t have financial planning training, so their point of view is narrow, especially in regards to risk management. Hence they would provide the advice they do now because that’s the limit of their training. And that’s why the accountants’ smsf exception allowing them to advice on smsf is expiring middle of 2016.

        But in the mean time… Sigh.

      • Stat, generally we are successful at talking them out of it pretty quick smart when you can show them the holding costs and the opportunity costs + the additional (and almost always unneccessary) risks they are talking about taking on.

        The above client example, we had initially talked them out of doing this, now at the 11th hour they have changed their mind again.

      • @ JC – – well done to talk the plebs out of the NG BS – —

        However it would be in your absolute interest to do so wouldn’t it? I mean the RE Agent gets the commission & you lose out on all the %$ for investing them in some Managed Fund with probably ongoing trailing fees & the chance to churn a bit later on when a review come up – — – –

        Not picking on you but I do know the industry & ANYONE out there not doing their own thing should insist on paying a hourly FEE for service if they have a choice. If you don’t have choice at this time the make it a Goal !

        Its a totally F$#@ed & crooked Industry with some Honest practitioners – but they are far & few between.

    • That would be poetic justice. But won’t happen. They’ll come bleating for help and the nanny state will provide, at your and my expense.

      • Agree.

        Banks that make these loans should be punished severely and receive no taxpayer support. Equally unlikely.

      • i don’t know if i agree…

        If the leveraged investments fail on a large enough scale, and that is what we assume if SMSF’s go belly up in a big enough cohort to ask for nanny state assistance, then can we not also assume that the soverign is tapped out by having bailed out the banking system?

        the bail out of the banking system will happen at your/my expense sure, but additionally bailing out the people who speculated with their super is likely to be beyond the appetitie of the politicial class, who will have blown public goodwill bailing out the banking system?

        sorry – above is 2 really long sentences…

  3. ceteris paribus

    If King Capitalist Keating is calling for and end to it, it must be time to apply the brakes.

    As an aside, there is a lot of surprisingly positive stuff in Interim Murray. I hope he doesn’t recant in his final report under pressure from the bankers/retail supers.

    • Mining BoganMEMBER

      Ha! Yes, it’s like when Keith Richards told Amy Whitehouse to slow down on the gear.

      • Keef has a history of being right on that issue – he threw Gram Parsons out of his for riding the horse too hard. If Keating is similarly prescient, those brakes need to be applied pronto.

  4. While we’re on property, anyone noticed the new front page of Domain? Giving total listing numbers I assume.

    When I first switched over 3 weeks ago it was at 312k now it’s 329k. Probably standard for this time of year, but will be worth watching.

  5. This is mad. What a country were living in. Everyone, even the parasitic financialized segment of the economy concedes it’s mad, but yeeeeehaaaawww! Mofos! It’s the only way to gooooo!

    It can be reasoned that it makes sense!

    1 Shit sandwich coming right up for ‘straya.

  6. I warned against this in my submission to the Henry Tax Review when it was well below the radar… See

    This was totally predictable and I agree wholeheartedly with Leith that, if the Howard Government genuinely had the public interest in mind, then it was a massive mistake… Being cynical I think the result has been what they intended…

    Having said that, I think it is now being set up as a straw man – so much so that even an ex-bank CEO who oversaw a good proportion of the runup in leverage against housing (and is now heading the FSI) has pointed to the risks created by it…

    Seriously, what a joke… the only reason it represents a risk is because the debt pushers have put the whole market at risk through the massive leveraging that has taken place over the last decade and half… If leverage against housing, and consequently prices, were lower than it would not be an issue…

    In actual fact, having recently set up a SMSF to purchase a property (yes, you read correctly, but in a highly depressed market where most of the stock was built for holiday letting and where renters have benefited by the downturn in tourism by gaining access to better positioned rental homes at better prices), I would suggest that the rigmarole of setting it up would mean that the money will likely be more “patient” than “negatively geared” money…

    (The only other risks of SMSF relate to the age old problem of property spruiking and quality of advice – note I did all of my own research for the property and I estimate I bought at about 50% real discount to the earlier peak.)

    Bottom line, the SMSF straw man is being set up to knock down and to say something has been done about the distorted market, but…

    take a look at the example advertisement that I put in my Henry submission… spruikers will all just switch back to the negative gearing angle…

    Bottom line is that they need to overhaul the entire taxation system in relation to housing

    (Full disclosure, and at risk of earning the ire of earlier foes, my family portfolio now also includes a negatively geared property – in the same market as my SMSF property – and taxation was an insignificant consideration in my decisions to invest)

    • I should add that I understand the push by MB and others to ban it – in that it actually appears achievable in the current political environment, when negative gearing remains untouchable – but I just find it ridiculous that political “insiders” can suggest it is creating instability while acting like negative gearing (and some of the others listed by Lorax below) has not already done the damage…

      I’ll put it this way, if the housing market were as it were a decade and a half ago, SMSF leverage would present less risk to stability of the market than negative gearing…

      But it’s not…

      Still, someone has to call Bullsh!t to the straw men builders and say that if you reckon that SMSF is causing a problem then what you are really saying is that you consider our market precariously positioned…

    • Brett, you worked hard for the cause of affordable housing and I thank you for that. There are so few good places to invest under the current regime, I don’t blame you for buying, and no intelligent person would.

      We have world-beating housing costs on an island with the most land per person. We have a trillion dollar debt bomb here created by Mr Keating, Mr Abbott, and every Prime Minister in between.

      It is an interesting theory about the SMSF strawman. I too wonder why the old puppet has been dragged out again. Here’s an alternative explanation. Bring in the SMSF borrowing, then ban it. The market tanks and two years later the puppet advises to re-instate borrowing inside SMSF. The propaganda would be that banning borrowing CAUSED house prices to fall. The truth doesn’t matter. Hockey gets to re-instate the popular measure to restore the market, and gets to call himself the “world’s best treasurer”.

      • Thanks Claw… I guess it’s possible… It certainly worked for negative gearing after Keating temporarily removed it in the 1980s (even though the evidence is now clear that its removal did not affect the rental market in the way its proponents argue) – NG hasn’t really been challenged since…

        My whole point is that if they were fair dinkum (which I believe they are not) then the FSI would discuss the full range of distortions in the market, and develop an “exit strategy” from all distortions (including grandfathering so as not to cause wobbles esp in Sydney and Melbourne)…

        If I had a guess over which distortion had the greatest destabilising potential over the long term between NG and SMSF I would say negative gearing…

        But perhaps, from where we are now, SMSF provides access to a pool of “new” money and is a greater immediate risk???… But lending finance data suggests there is still no shortage of negative gearing investors coming into market…

        Worth also bearing in mind that to borrow in SMSF for property can only borrow at most 80% of purchase price so SMSF investors must have more skin in the game… And I think can not be IO (ie must also pay principal)… That together with the cost and involved process in setting up the arrangement means that SMSF investors will be more stable than NG investors…

        For me personally, I attempted to show in my post that I remained true to my principles in my investment choices – I am against speculation in housing leading to Australians being priced out of owning a home, but I invested where property was built not to house people but to provide holiday accommodation, and in actual fact people have been advantaged by the tourism downturn and have had access to that accommodation for longer term rental… Of course, I would expect that as the dollar falls and tourism improves, that process will reverse, but the numbers stack up well even on long term rental figures… There is also the commonwealth games coming up 😉

        Most of my investment decisions over the last 18 months, including what I mentioned on one of Chris Becker’s thread a few weeks back (purchasing Berkshire Hathaway stock), have been based on a medium term view that the AUD will fall… But the fundamentals of the investments still stack up on current metrics…

      • I think you fellas may be thinking there’s foresight being employed here. That anyone in any position of influence or power actually thinks beyond what’s necessary for the here and now – in a way that would allow for cleverly nuanced scheming or backhanded double takes (for the benefit of the greater Australian polity!)

        I don’t see it.

        I think it’s been a case of ‘DANCE WHILE THE MUSICS PLAYING’ since 2008. Don’t worry about the type of music! or the fact you dance like a cockroach thrown on a briquette bbq!

        Just dance!

        None of this will unwind in a calm way. For anyone.

      • You may be right… I was thinking there was a chance that the slow melt might succeed, up until it became clear that the RBA was “managing” the “handover” while still being sceptical about macroprudential tools… better late than never, so let’s see…

  7. one of the biggest blunders of the Howard Government.

    What were the others?
    – 50% capital gains tax discount
    – repealing fuel excise indexation in 2001
    – tax free super lump sums
    – up to $1M in concessional super contributions in 2007
    – extravagant middle class welfare

    Feel free to add to the list.

    • PlanetraderMEMBER

      While I agree that LRBA arrangements for residential property inside a SMSF should be banned, the same shouldn’t necessarily be the case for commercial property where you operate your own business from.

      Provided the gearing is appropriate, it can be a sound strategy for small business owners who are trying to grow a business, employ staff and generally be productive. If you restrict borrowing to only properties that you operate a business from, and the LVR is restricted to a level (for instance say 50%), at least the tax concessions have a chance of assisting a business owner rather than a passive rent-seeker.

      • All leverage, not just for property, should be banned for SMSFs.

        But if people want to put property, including residential property, that isn’t leveraged, in their SMSFs then that should just be a matter for them.

      • PlanetraderMEMBER


        What is the difference between buying a bank share or any company share for that matter that is leveraged internally vs a commercial property that is leveraged externally?

        I can buy internally geared share funds in an SMSF – what is the difference?

    • Feel free to add to the list.

      Selling Sydney airport.
      Frankenprivatisation of Telstra.
      Huge runup in private debt.
      Excessive immigration and no infrastructure.
      No new cities.
      Not handing control over to an Abbott and Costello leadership.

      • GunnamattaMEMBER

        ‘No new cities.’

        I must admit I think there is tonnes of scope for simply saying we are going to create maybe two or three new large cities and shunting public service positions to them to help get them off the ground. Maybe somewhere up the QLD Coast, somewhere up the WA coast and maybe somewhere inland if it could be made to work. I’ve always though Wagga Wagga could be made larger than it is.

      • innocent bystanderMEMBER

        @gunna, I have sometimes wondered if the best way to create more big cities isn’t to create a few more states? probably too late now but when the mining construction boom was on a new North WA and new north Qld (FNQ) would be the go. That way we get more state competition, some bigger cities…

    • super in general needs an overhaul. You have a super account and once you reach preservation age you have to purchase a pension account and the tax rate goes to NIL from 15%, and you now effectively run two accounts.

      It needs to be rationlised. One super account and a flat 15% tax rate in. Once preservation is reached and a pension started there should be no need to “purchase” a separate pension account. It should just be the same account. The internal tax rate stays at 15% and you can still withdraw an income stream tax free. Fairer, simpler and easier. The fund is one fund the whole way through, 15% for money in and 15% for earnings once in at all times, tax free pension once qualify.

  8. Remember, every investment in public listed shares is already a leveraged investment as there is leverage within the company even if there is no leverage of the shares. That is why shares are volatile and have big drawdowns from time to time every 4 to 8 or 10 years.

    If you buy a listed property trust it is generally leveraged, so why discriminate against the same amunt of leverage on a property owned directly by a SMSF?

    A more sophisticated appraoch is necessary but even the old trustee investments scheme had flaws and was gamed by some eg Rothwells from memory.

  9. Over lunch I heard about a corker of scheme running at the moment (I wont name names)

    Basically large blocks from even larger land holdings are being sold through ‘options’ to investors (ranging from 30 – 50k) to be exercised in 10 years at current prices (~$200k) – these blocks are in regional Vic and Qld. (On the nose but I don’t think illegal)

    Investors who cannot fund externally are offered SMSF and a back office company looks after the transfer. Commish to salesman around $4k per trans and received within 3 days (fully trackable) – this bit rings the klaxons – especially when I need to put together a 40 page Statement of Advice to recommend an investment option for a client.

    Might be looking at Storm II here…..

  10. When every financial planner stops receiving commissions on the products they sell (especially managed funds) I will start listening to their views on property in SMSF. Until then I will just take their comments as sour grapes as they get no money when a person buys a property in their SMSF.

    Also for full disclosure I have a SMSF which was set up nearly 15 years ago and I have two leveraged properties in my SMSF, which are not negatively geared.

    Also during that time I suffered some large losses on my share investments in various market crashes. In fact to date I have had more losses on shares than anything in my property portfolio (both inside and outside of super). So those scared about property losses – what about all the share market losses lots of people have experienced in their super even though the fund managers still got their mega salaries