A new report by the Council of Financial Regulators (CFR) and the Australian Tax Office (ATO) has found limited recourse borrowing arrangements in SMSFs are not a risk to the financial system.
The report by CFR and ATO was commissioned by the government as part of their response to the Financial System Inquiry.
The report found limited recourse borrowing arrangements (LRBAs) are almost completely exclusive to SMSFs. However, they form a low proportion of SMSF assets.
About 8.9% of SMSFs currently have a LRBA in place, and LRBAs hold 5.2% of total SMSF assets or 1.4% of total superannuation assets.
The Government said because these numbers are so low they will not be making any changes to LRBAs and will instead request the CFR and ATO continue to monitor this type of borrowing in SMSFs.
The Government has indicated it expects another report on the matter in three years' time.
The Productivity Commission recently reported LRBAs do not "currently pose a material systemic risk" but "active monitoring is warranted to ensure that SMSF borrowing does not have the potential to generate systemic risks in the future."
However, regulators have already taken steps to reduce the risks associated with LRBAs. APRA's lending standards have been strengthened and ASIC's scrutiny of responsible lending compliance has increased.
Treasury said in a statement that the Financial Adviser Standards and Ethics Authority's setting of new educational requirements for advisers will help improve the financial advice, including in relation to LRBAs.
A LRBA involves an SMSF taking out a loan from a third party lender and then using that loan to purchase an asset held in a separate trust with investment returns earned from the asset going to the SMSF.
If the loan defaults, the lender's rights to the asset are limited because the asset is held in a separate trust.