Borrowing by superannuation funds to finance investments is unlikely to pose a material risk to the superannuation or broader financial systems, a review of leverage in the super system has found.

But the report, conducted by the Council of Financial Regulators working with the Australian Taxation Office, cautioned that borrowing can represent a significant risk to individual’s retirement savings where they have low-balance self-managed super funds with high asset concentration.

In 2007, the government made amendments to the Supervision Industry Supervision Act that allowed fund trustees to borrow under so-called limited recourse borrowing arrangements to fund investments.

Since then, the use of LRBAs has been almost entirely limited to self-managed superannuation funds. The number of SMSFs with LRBAs has increased over the years, growing from 2.9 per cent of SMSFs in 2013 to 11.8 per cent in 2020.

Assets financed with LRBAs increased from $8.8 billion in 2013, representing 1.9 per cent of total SMSF assets, to $59.7 billion in 2021 (7.2 per cent of total SMSF assets).

Real property is the main assets purchased by SMSFs using LRBAs. SMSFs accounted for less than 1 per cent of overall residential mortgage lending 

The report concluded that assets held under LRBAs make up a “relatively small but not insignificant” proportion of SMSF assets overall.

Notably, LRBAs are more often found in funds with lower balances, accounting for 71 per cent of total assets for SMSFs with LRBAs.

The report said that such funds, with highly concentrated assets, can face significant risk. “Less diversified SMSFs with LRBAs are exposed to asset concentration risk, which in the event of a fall in the asset’s price, could lead to a significant loss in value of the SMSF which could be magnified by borrowing.”

The report said there is evidence of “conflicted and poor-quality advice” being provided to individuals regarding the use of LRBAs, including through “property one-stop shops”.

The use of LRBAs is subject to a number of rules. They can only be used to acquire a single asset, must be limited recourse and the asset must be held in a separate trust until it has been paid for. These measures are designed to protect the other assets of the super fund if the loan goes bad.

This has not stopped high-profile commentators calling for LRBAs to be banned. Most notably, the 2014 Financial System Inquiry said the ability of funds to borrow may erode the superannuation system's ability to act as a stabilising influence on the financial system during times of crisis. 

At the time, the Reserve Bank agreed with the FSI, arguing that an additional potential risk was that geared property investment through SMSFs may act as an additional source of demand that exacerbates property price cycles.

"The compulsory and essential character of retirement savings implies that it should remain largely unlevered," the RBA said in its FSI submission.

The Council of Financial Regulators and the ATO conclude that their investigation and previous reports on the issue “demonstrate that borrowing by SMSFs through LRBAs has not posed a material risk to the superannuation system or broader