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  Latest Financial Planning News
Business confidence hits 5-month high: NAB
New Year resolutions, New Year strategies
How will downsizer contributions work for SMSFs?
Where Australia is at. Our leading indicators.
‘Read the tea leaves,’ brace for cryptocurrency regulation, advisers told
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Resources on our site to help you, your family and your friends.
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Key Economic Indicators, 2017 - updated
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Australian population figures
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There's no magic pudding when it comes to super
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Federal Budget - 2017-18 - Budget documents
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Merry Christmas for 2016, a Happy New Year and a prosperous 2017.
ATO set to clamp down on range of super issues
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Stretching retirement income
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Market Update – September 2016
Checking in on our 2016 economic outlook - and looking ahead
Making a fairer and more sustainable Superannuation System
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Market Update – August 2016
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The three biggest economic issues likely to affect markets in 2016
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Strong economic data stablises markets
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Market Update - June 2016
ATO extends looming SuperStream deadline
ATO's deadline for review non-arm's length LRBAs extended
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ASIC flags SMSF investors in scam risk
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Budget 2016-17
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Estate Planning - early inheritance
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Market Update – March 2016
Going solo
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Preservation Age Rule
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Market Update - 29th February 2016
Mortgages, personal debt and retirement
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Market Update – 31st January 2016
Australians still need better retirement planning
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Merry Christmas and Happy New Year 2015
There's no one-size-fits-all retirement income
Market Update – 30th November 2015
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Why the ATO’s new powers make SMSF compliance more important than ever
'Unretiring' retirees
The detrimental impact of poor SMSF record-keeping
Counting the cost of 'grey' divorce
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Another telling reminder for SMSF trustees
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Strategy over structure
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Good (investor) behaviour
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SMSF and limited resource borrowing – a warning

At times in our financial lives borrowing to invest makes good sense. For the majority of people when financing a new house borrowing is more out of necessity than a decision to leverage for wealth creation reasons.



       


Sensible levels of borrowing are an accepted part of business and investment strategies and in the financial planning and accounting worlds are intertwined with tax planning.


But when it comes to your savings for retirement does borrowing - with the inbuilt risk that comes with leverage - make sense?


This is a particular issue for people saving for retirement via a self-managed super fund because limited recourse borrowing is a real option and one that is increasingly being marketed aggressively alongside property development schemes.


Certainly the David Murray-chaired Financial System Inquiry did not think borrowing via SMSFs was appropriate and has recommended to the Federal Government that it be banned. The government has yet to announce its response.


The FSI recommendation though flows from concerns that increasing levels of limited recourse borrowing will, over time, increase risk in the broader financial system. Certainly the use of leverage, while still a small part of the SMSF asset pool, has been growing strongly in recent years with the amount of funds borrowed increasing from $497 million in June 2009 to $8.7 billion in June 2014 according to the final FSI report.


But the issue raised by the FSI is a different question to whether it makes sense for you and your SMSF.


Vanguard recently released the Investment Trends' latest SMSF Investor Trends report. Based on about 3900 investor responses, the research showed that for the first time in five years the interest in borrowing within an SMSF was losing favour.


No doubt the considerable amount of publicity flowing from the Murray Inquiry recommendation and the focus on limited recourse borrowing arrangements by ASIC has been an influenced SMSF trustees' attitudes to using borrowing within their super fund.


Asked what the barriers were to borrowing within their SMSF, 29% of investors felt borrowing within their SMSF was inappropriate (29%) while 15% said borrowing inside the SMSF was too risky and 11% pointed to the legislative uncertainty.


The question of whether borrowing within an SMSF is appropriate is a complex (and costly) discussion and anyone considering it should seek financial planning and accounting advice from an SMSF specialist.


ASIC has been proactively warning investors about property spruikers trying to lure investors into direct property investments by getting them to set up an SMSF, roll their existing superannuation balances into it and then put borrowing arrangements in place to fund the property purchase.


Clearly those type of arrangements and sales techniques are a cause for concern.


While the Murray Inquiry was primarily concerned about introducing risk into the broader financial system for the individual investor the risk is much more direct - the risk of destroying rather than creating wealth to fund your retirement.


 


By Robin Bowerman
Smart Investing 
Principal & Head of Retail, Vanguard Investments Australia
24 August 2015


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