SMSF buy ban politically deft but dangerous

Labor’s decision to ban self-managed super funds from borrowing to buy property is a deft political move implicitly supported by the Reserve Bank, but on closer ­inspection it is arguable such a policy move is necessary.

The virtue of such a ban — even if it is backed by no less a ­luminary than former CBA chief David Murray — has to be questioned in the context of an SMSF system that will become much more limited in scope from July 1 when a raft of unprecedented “caps” on both contributions and pension income funds come into place.

At the very least, it would represent another deterrent to a system still reeling from a glut of reforms that run the real risk of pushing massive numbers of ­people back on the public pension system.

Separately, there is a strong ­element of double standards in any move to cut borrowing from SMSF funds because they are ­already allowed to invest in a range of funds that borrow. There is no limit on how much an SMSF fund can place in, say, hedge funds where the borrowings are not just extensive but utterly opaque to the investor.

The Labor Party has spoken of an “explosion” in SMSFs borrowing in property, pointing to a tenfold increase in lending from $2 billion in 2012 to about $24bn today but this is misleading. Borrowing for SMSFs became legal only in 2007, while the provision of products from the wider industry that actually allowed investors to enter borrowing arrangements did not take off until at least 2012 — in other words the $24bn figure — which is by no means significant in the vast arena of superannuation assets — came from a standing start a decade ago.

Of course there must be caution exercised by any investor at any point in the investment spectrum — and SMSF borrowing is no exception. Regulation rather than a blanket ban should be the answer here. Indeed, it is clear from the higher costs imposed by lenders on SMSF borrowings than on conventional property lending arrangements that banks are already covering their risks in this area.

After a decade of immense success when the number of SMSFs in Australia has grown to one million members, there is a real and present risk the system will go into decline if its attractions are continually diluted — all the more reason then that SMSF members should be allowed to exercise their full suite of investment skills, which includes borrowing to buy property.