There has been considerable media coverage recently of concerns raised by ASIC relating to the aggressive marketing of geared property investments within SMSFs by unscrupulous operators. While there is a role for geared property in an SMSF, it should only be contemplated where trustees have access to best-practice advice from a licenced and properly qualified adviser. This blog is to educate readers on the complexities of purchasing a property investment in an SMSF particularly where a limited recourse borrowing arrangement is involved.
Recent media has focussed on the risks of investing in geared property by self-managed superannuation funds (SMSFs) and whether it is really the right long-term decision for a member’s retirement. It can be the right choice for some but it’s not for everyone. Opportunities come with risks which are the same as any individual’s decision to make a personal property investment. There are however some risks which are unique to SMSFs.
There’s no question that property can reward investors with capital growth and steady rental income. However, when it comes to property and SMSFs the investment needs to be carefully considered. This applies especially if borrowing is involved, due to the potential demand on the fund’s cash flow that is provided by a steady stream of contributions. In hard times if the property cannot be leased out, the cash flow from contributions can be used to pay for investment expenses.
The advantage of an SMSF investing in property is the generous tax concessions given to super. Rent from the property investment will be taxed at 15% and capital gains from selling the property can be as low as 10% while saving for retirement. If you decide to take a pension from your SMSF any rent and capital gains can be tax-free. On the other hand, because of these low tax rates the benefits of negatively gearing (expenses of the property are greater than the rent received) an investment property can be less than if you did this as a personal property investment.
Also, insurance and whether a large illiquid asset like property will suit the SMSF member’s needs for their retirement must be considered. Selling an illiquid asset like a property can also take time and involve higher costs than liquid assets such as ASX shares, which can normally be sold very quickly. The sale of the property may also result in a large inflow of funds all at once, rather than a steady stream of income. This needs to be managed carefully if an SMSF is to pay you a pension.
An SMSF can invest in residential and commercial property either directly if it is ungeared or by using a limited recourse borrowing arrangement where it borrows to purchase a property that is held in trust on behalf of the fund.
