A new SMSF property rort emerges

Earlier this year, the Council of Financial Regulators (CoFR) recommended the federal government impose a ban on property investment through self-managed superannuation funds (SMSFs) after 18,000 SMSFs were found to have over 90% of their savings in a single asset class, primarily investment properties. However, its recommendation was ignored by Treasurer Josh Frydenberg:

Regulators urged the government in February to ban property investment through self-managed funds, after the amount of LRBAs [limited-recourse borrowing arrangements] held by the sector rose to $40 billion, a 10-fold increase from the $400 million figure a decade ago.

Ahead of the May 18 election, Josh Frydenberg snubbed a recommendation from the Council of Financial Regulators — which includes the Reserve Bank, Australian Prudential Regulation Authority, Treasury and Australian Securities & Investments Commission — over concerns about LRBAs threatening the savings of individual retirees and the wider financial system.

The CFR raised the alarm that many low-balance SMSF owners had the majority of their savings tied up in a single property, which left nest eggs vulnerable to falls in property prices, and its “preferred option” after the three-year review was a ban.

Now, DomaCom Australia is planning to pour more fuel on the SMSF property dumpster fire, launching a product allowing parents to leverage their SMSF to purchase property that can be legally tenanted by their children. From The AFR:

DomaCom said it had the all clear from the Australian Tax Office for a novel arrangement that would allow young people to co-invest with their parents and apply to live in that property, as long as rent is paid at market rates.

DomaCom founder Arthur Naoumidis said he wanted to tap superannuation to dramatically expand the capacity of the so-called bank of mum and dad to help youngsters on to the property ladder…

“Parents will be able to more formally support their kids to get on the property ladder using their SMSF on an arm’s-length basis,” he said.

“The bank of mum and dad already provides $30 billion of support and we believe this could be a much larger amount”…

Is this really the purpose of Australia’s superannuation system: allowing SMSFs to be turned into speculative 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?

Independent economist, Saul Eslake, said it best when he described the Howard Government’s initial decision to allow super funds to borrow for property 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.”

Having mums and dads using the tax-subsidised position of superannuation to buy property, and feeding the bubble, is a recipe for disaster.

Schemes like DomaCom’s will add yet another layer of pro-cyclicality and risk to Australia’s housing market.

Leith van Onselen

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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