More property investors tapping Super opportunity

Self-managed super is growing as a potential solution to housing woes, but experts are urging caution just as this route into real estate comes under threat.

Property investors are using SMSFs to boost their real estate access.

Aspiring property investors are eyeing self-managed super funds as a potential solution to their housing woes. But as more workers push into SMSFs, this route into real estate looks to be under threat.

Investing in property, both residential and commercial, has long been one of the key attractions of having an SMSF.

It is the only way members can directly hold real property within a super fund and borrow to do it, and it can come with some generous tax perks.

We know the profile of the self managed super investor is changing: it’s younger, it’s leaner (financially at least) and it’s not all that interested in financial advice.

With more young people taking control of their super and tipping their nest eggs into SMSFs, there’s every chance these investors will look to leverage their savings to boost their borrowing capacity using limited recourse borrowing arrangements (LRBAs).

Indeed, this trend already appears to be in train, with the value of these LRBAs passing $63bn, up more than 11 per cent on a year ago, according to the latest statistics from the Australian Tax Office.

Crunching the numbers

While buying property through an SMSF may seem appealing, it’s only really beneficial to choose this route in limited circumstances, says Olivia Maragna of Aspire Retire Financial Services.

While you can’t purchase a home to live in with your nest egg (it must be for investment purposes), a business owner can buy non-residential property, such as a factory or workshop, through their super and lease it back to themselves, she says.

“There are a small number of people who can benefit greatly from buying property in an SMSF, such as those who buy their own business assets,” Maragna tells The Weekend Australian.

“With this, you could ultimately grow something in a very tax-efficient environment for a very long period of time with a secure tenant, because you’re the tenant.

“And then if you retire and maintain that building, or factory, or whatever it is, in retirement, you have a great yield coming in that’s completely tax free.”

For investors needing to borrow to purchase property, LRBAs set up with a holding trust are used in SMSFs.

Like the name suggests, these LRBAs limit the recourse a lender has if you default on the loan.

But they don’t come cheap.

When buying through an SMSF, lenders generally want to see higher deposits – and these must come from your SMSF – in the range of 30 per cent plus. And the rates are higher than your typical home loan, with some charging over 9 per cent, according to figures compiled by RateCity for The Weekend Australian

None of the big four banks offer SMSF loans, with these top tier lenders having stepped out of the market following the Financial System Inquiry in 2014, according to RateCity head of research Sally Tindell.

LRBAs under threat

Property accounts for about 15 per cent of the roughly $900bn in SMSFs. About 10 per cent, or $92bn, of this is in non-residential real estate, with the remainder, around $50bn, in residential property.

But some, including the Greens, are pushing for change.

Greens MP Max Chandler-Mather has, in recent weeks, called out property investment in SMSFs as a form of tax sheltering and said the use of LRBAs in SMSFs was “turbocharging financial risk in the super system” and “fuelling property speculation and pushing aspiring first-home buyers out of the market”.

Greens MP Max Chandler-Mather wants to ban SMSFs borrowing through LRBAs. Picture: Martin Ollman

In exchange for their support for Labor’s Division 296 bill, the Greens want the government to ban SMSFs from borrowing through LRBAs.

They also want the proposed cap on the additional tax on super balances to be lowered from $3m to $2m.

KPMG’s head of SMSF and estate planning, Julie Dolan, puts it plainly when addressing the Greens’ argument on SMSFs driving up property prices.

“What they’re saying is absolutely not true. The latest ATO numbers show there’s been a steady increase over many years but there’s been no spike. And it’s still a very small percentage of the hundreds of billions of dollars in the SMSF industry,” she says.

The new proposed tax on unrealised capital gains will also capture SMSFs holding high-value property, raising potential cashflow issues.

Like KPMG’s Dolan, SMSF Association chief executive Peter Burgess dismisses the notion that LRBAs pose a risk to the system. Instead, they should be celebrated for delivering the benefit of leverage in boosting retirement savings, when done right, he says.

“SMSFs are very much about choice, and leverage, when used in the right circumstances, can help people to increase their retirement savings,” Burgess says.

“People that entered into these LRBAs 10 or 15 years ago and have since paid back the loan, the property market has gone up, and they’ve got the benefit of leverage.

“Now, of course, it can go the other way. If the market’s going down, you magnify your losses. But when used in the right circumstances, with the right advice, LRBAs can be very useful in terms of helping people to grow their retirement pot.”

Originally published as More property investors tapping Super opportunity