Self-Managed Super Fund Property Buying Sky High Amid Serious Concerns

Will SMSF property buying die down in 2014?

The big question in 2014 is whether we will see any tapering of self-managed super funds buying property through borrowing, given the concerns expressed by regulators, Treasury, RBA and the new government.

In 2007, superannuation laws changed which resulted in capital gains tax exemptions and fewer restrictions on self-managed super fund borrowing. 

This led to $60 billion being poured into SMSF property investments since 2006.

Authorities Not The Only Ones Worried About Self-Managed Super Funds’ Property Buying

Not surprisingly, the RBA is worried that the housing market may overheat due to SMSF property activities.

Genworth, Australia’s biggest underwriter of lenders mortgage insurance, recently announced that they will no longer accept off-the-plan or new properties as security when purchased in SMSFs. 

They are obviously concerned about the future capital growth prospects of these property types and the SMSF mechanism. 

But For Many, Benefits of SMSF Borrowing Are Simply Too Tempting to Pass Up

For SMSF trustees who lack funds for direct property investments, or who would like to maintain the fund’s ability to diversify, SMSF borrowing offers a fantastic opportunity to add property to the fund’s portfolio.

Those with a small business can also gain a CGT exemption of up to $500,000 by transferring business property into their SMSF. 

You can even borrow personally then on-lend to your SMSF.  As the fund will repay the loan to you over time, your money is not locked in until you retire like contributions are. 

Additionally, there are other tax savings possible on repayments associated with SMSF loans.

Complex Rules The Key Risk to Self-Managed Super Fund Property Investments

The biggest problem with SMSF borrowing is that it is governed by complex rules.  Investors who get it wrong face serious setbacks in relation to their retirement plans.

One important rule is that the asset purchased by the fund through SMSF borrowing must be done so using a Limited Recourse Borrowing Arrangement; this prevents lenders from having claims over any other SMSF assets.   

It is worth noting however, that lenders will often ask for personal guarantees to reduce their exposure, therefore putting the investor’s non-superannuation assets at risk.  SMSF property loans also tend to be more costly.

Another rule is that the amounts borrowed must be used to acquire a single asset as opposed to a group of assets. 

The asset acquired cannot be improved upon or replaced while the loan is outstanding.  From the viewpoint of a property investor, this requirement can be confusing and restrictive.

SMSF Borrowing is a Sophisticated Mechanism That Attracts Property Sharks

Ultimately, the most serious risk facing SMSF trustees with property investment is the quality of the property in terms of capital growth and the direction of the property market.

However, the complex nature of the SMSF mechanism lends itself to risks arising from unscrupulous lenders, brokers and property sharks offering inappropriate advice. 

To this end, ASIC has recently warned of penalties against real estate agents who without appropriate licence, recommend the use of SMSF property investments.

Property investment advice is currently unregulated; something that Street News believes needs to be changed and regulated by ASIC due to the level of risk exposure to consumers.

The information or opinions contained in the commentary are general in nature and should not be construed as investment advice or financial product advice. Any research or analysis contained within the commentary is specific to the execution of a purchase brief provided by a licensed adviser. Kristie Kwok is not licensed to provide advice on regulated financial products and the information should not be relied upon to in determining the appropriateness of SMSF property purchases.