ATO: SMSF mortgages a ticking time bomb

By Leith van Onselen

The Howard Government’s decision to allow self-managed super funds (SMSFs) to leverage into property and other investments was a mistake.

Specifically, it allowed SMSFs to be turned into speculative vehicles rather than savings vehicles, in turn dramatically increasing the riskiness of Australia’s retirement savings and financial system, further inflating Australian house prices, and transferring some of the downside risk to taxpayers, who of course backstop the retirement system via the Aged Pension.

Late last year, the major lenders clamped down on SMSF property borrowing following damning evidence presented to the Banking Royal Commission in April, which revealed how one of Westpac’s financial planners advised a client with $200,000 in an industry fund account to set up a SMSF, sell her home and take out a loan to buy a million dollar investment property.

However, despite these measures, leveraged investment into property by SMSFs continues unabated, according to analysis published last week by The Australian:

A surge in property speculation by leveraged self-managed super funds amid sliding house prices in the nation’s biggest cities has sparked concerns among the powerful Council of Financial Regulators that many may be in over their heads…

Documents collated for the regulator show the total value of property investment loans held by SMSFs has raced to $39 billion — more than 5 per cent of all assets in the $700bn self-managed super sector by the end of the June quarter…

“Of interest is that NSW and Vic have the highest number of SMSFs and Sydney is ranked first and Melbourne ranked third for falling house prices,” the ATO’s director of superannuation told Treasury in September…

This had led to warnings from ATO about $12 billion of SMSF property loans that are secured by assets held outside of super, such as owner-occupied housing. From The AFR:

ATO assistant commissioner Dana Fleming said the risk of property market contagion was exacerbated for SMSFs by the fact that 30 per cent of these borrowings involved a personal guarantee or other security…

“If people are providing a personal guarantee and we had a massive property decline that caused the bank to foreclose on the loan, and selling the property didn’t cover the loan, the personal guarantee is triggered.

“This means their other personal assets outside of super become at risk.”

Back in 2016, David Murray –  the chairman of the Financial System Inquiry (FSI) – reiterated his call for SMSFs to be banned from borrowing to invest because of its risk to the financial system:

“Superannuation funds should not be leveraged, including SMSFs, because leverage magnifies risk. If the system is unleveraged, then if asset prices rise, bubble and fall then all the loss is contained within the superannuation funds and does not have another contagion effect because there are no forced sellers of other assets”.

Saul Eslake has also described the Howard Government’s decision to allow super funds to borrow as “the dumbest tax policy of the last two decades”:

“The last thing Australians really needed in the last 20 years is yet another vehicle or incentive for Australians to borrow more money in order to speculate on property prices continuing to rise”…

“You might have thought that someone would have heard the term ‘limited-recourse borrowing’ and recognised that there were some significant risks associated with it that we could have done without in the Australian context.”

Certainly, having mums and dads rushing into property investment using the tax-subsidised position of superannuation, and feeding what was already a property bubble, was a recipe for disaster.

It’s a crying shame that the FSI’s recommendation to ban super fund borrowing was ignored by the Coalition Government. Now, it has added another layer of pro-cyclicality and risk to Australia’s housing market, with the potential to exacerbate the bust as Labor and the regulators belatedly crack down.

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Unconventional Economist
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  1. Another of the rodents policies that continues to ruin the country so he could buy votes. The amount of treacherous policies howard and costello implemented never ceases to amaze.

    • Yep. And they call themselves patriots. I thought right from the start this policy in particular was absolute madness. Turn your super into a casino.

    • And the number of voters to this day claim that prime minister rodent was the best prime minister Australia has ever had! The demographic which has never witness the full blown recession, or the well off retirees.

      • proofreadersMEMBER

        The veneration of Howard is one of the great con jobs of all time – he’s responsible for quite a number of the problems Straya has.

    • Howard basically forced us all to work harder for less. That was his aim really. The harder we work, the more taxes we pay, the more revenue the Government generates etc..

    • It was Hawke & Keating who from 1984 dramatically altered Australia’s financial system from savings to debt based by floating our dollar and our national bank (CBA), bringing down tariffs etc which closed down factories and industry which began a selling off of our country to foreigners. By the time Howard and Costello took over, it was too late to reverse the economic changes, except to bring in a GST to replace the lost revenue from tariffs. The winners from this credit pumping, debt based economic system were of course the FIRE sector, property and powerful bureaucratic public sector unions including universities (goodness they are all globalists). It works so long as the supply of credit increases AND simultaneously becomes cheaper by lowering interest rates. But what happens when the credit supply cannot grow at the same rate and you cannot lower the price of credit?

      • Great post. Unravelling this is going to cause a lot of pain, unfortunately not for the people responsible.

  2. The LNP has a very simple and singular political function, that is to collect less tax and spend less tax.

    Everything that absurd organization does or says is dedicated to that cause.

  3. I’m sick of reading about issues with SMSF leverage.

    Can we skip all this and just get to the end destination of taxing the tits off timid normal people to bail out the masses who gambled and lost this retirement savings?

      • Doesn’t matter. Non bank lenders weren’t in any compensation scheme either in 2010 when the AOFM went in and rescued them by buying their paper.

      • Folks need to be exposed to the consequences of bad decision making. That’s how as a country we will learn. It’s sad but a lot of folks deserve to go to the wall over poor choices – but such as it has ever been.

    • Jumping jack flash

      The fact is that taxes are way too low for this country. Its all well and good selling off government responsibility and control in the name of lower taxes but the average Australian never wins in the long term.

      What we face now is gouged costs of living from the private companies who bought the government’s power and control so the people working in those companies can repay their stupidly huge debt, plus higher taxes, because governments since Howard have all mindlessly lowered taxes just to be popular even when they couldn’t really afford it.


    But, but, constraining the ability of the world class Strayan banks to ‘foie gras’ the populace with debt will be a disaster as that’s all we have left in our legendary economy.

  5. Obviously, Howard/Costello need to take the primary blame for this. But, Rudd had an opportunity to repeal it cleanly because hardly anyone took advantage of it in the first couple of years, due to the GFC. As usual, they dithered and lost the opportunity.

  6. All good, let it collapse. Once our supply of cheap foreign labour dries up and it will, these 60 something boomers can move back into the menial jobs to fund their retirements. Check out the USA for a window into the future.

    • Nah they’re in the clear. By the time they stop drawing funds from the rest of us, everything will have been sold off. Tollways all along the Hume, various fees nickle and diming every drop of water, every watt of energy.There is enough unsold in Australia to fund the boomers one last hurrah.

  7. There will be epic tears over this one as a lot of boomers realize their cushy retirement cruising ain’t coming.

    • This post reminds me of the GFC. A boomer co-worker was very upset that his 10 (yes 10) investment properties were falling in value and he would have to work into retirement. Kevin Rudd came to the rescue to ensure this guy gets to live it up in retirement at the expense of young Australians.

      I recall reading there are around 10 million wealthy Chinese wishing to migrate to Australia. Don’t underestimate the capability of our government to screw over another generation of Australians with overpriced housing.

  8. I’d be more worried about the number of boomers who have gone guarantor on their kids first home purchases. FHBs normally have high loan to value ratios, which is why the banks want a backup. When those kids start splitting up with their partners, divorcing, and end up selling the house for a loss, guess who’s door the bank is going to come knocking on?

  9. All this boomer bashing belongs in psychological journals (Oedipus complex?) not in attempted economic analysis, class warfare anyone?

    • To be charitable, I think that they are talking about those older people who borrowed to put investment properties into their self-managed super funds. Such people took advantage of a rort, so it is hard to be sympathetic to them. Most of the blame belongs to the politicians who enabled and encouraged them to do it, however.

  10. Gearing itself isn’t the problem – yes it magnifies risk but there are plenty of high risk investments that an SMSF can invest in without gearing. Or you can invest in an security that has internal gearing which is just as risky.

    The problem has been the unregulated nature of the the spruikers and the gullibility of buyers spending too much on the asset. Interestingly, the banks are now almost all out of SMSF Property lending and the main lenders are the likes of Latitude who are much more loosely regulated.

  11. for years I have been spitting into the wind at SISFA SPAR ASFA and TTI as well as at liaisons with ATO and Treasury (glad K0’D retired) seemingly wasting my breath. Everyone seemed to think hunky dory and well you know property is as solid as houses and NEVER goes down and Aussie is different and blah blah blah.

    • Don’t waste your breath mate. Encourage it instead and then laugh if it blows up in everyone’s faces!

      Then You’re smiling everyday!

      • Too true. It just galls me morally to see my fellow “experts” caveat themselves out and lead folks that never should have been in SMSFs down the path to ruin (and its coming)