Property in self-managed super still makes sense, but know risks

THIS move can deliver Australians huge tax savings, but rule changes and market conditions are making the strategy trickier.

THE popular practice of putting property into self-managed superannuation funds (SMSFs) using borrowed money is getting harder.

Tougher lending rules and falling house prices in some cities are affecting SMSF property investors, and as research shows a slowdown in growth of new funds, investment and law specialists say it pays to know the rules.

Solicitor Elizabeth Wang, from Townsends Business & Corporate lawyers, said leverage and lower tax rates made the strategy attractive but changes by regulator APRA had moved the goalposts, particularly for SMSFs buying off-the-plan properties.

“With APRA’s new measures being in force, banks are now requiring SMSFs to have at least 40 per cent of the value of the property as a deposit in addition to the higher interest rates that banks are now charging,” she said.

Buying residential property within a self-managed super fund is a popular strategy.

“On top of this, many lenders are not approving finance for a fund that does not have at least $200,000 initially, and sufficient liquidity in the fund after the property has been purchased.”

Loans for property investment in SMSFs have jumped tenfold in five years, largely because investors can avoid paying capital gains tax on their SMSF property if they sell it after retiring at age 60.

The same property held outside super could attract a massive CGT bill.

Labor is expected to ban the practice if it wins the next federal election, and research this month by Vanguard and Investment Trends found that the establishment rate of SMSFs had dropped to a 10-year low.

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It said regulatory uncertainty was seen as a key challenge for SMSFs, and more people were looking to make investments outside super.

“Because of this it will be important for investors to ensure their entire portfolio — both inside and outside their SMSF — is aligned to their investment goals, in addition to keeping an eye on the tax efficiency,” said Vanguard head of corporate affairs Robin Bowerman.

Bell Direct CEO Arnie Selvarajah says there are several steps to starting a SMSF. Picture: John Feder/The Australian

If SMSF property plans still make sense, the first step to setting up a SMSF is building a team of financial professionals.

Bell Direct CEO Arnie Selvarajah said the SMSF Association’s “find a specialist” tool could help, and people needed to decide how many trustees their fund would have.

“You can opt to be a sole trustee or may want to include your spouse or other family members. You can also opt to have a corporate trustee,” he said.

The next step is having a trust deed prepared to establish your SMSF’s rules, usually with legal advice, registering it with the Australian Taxation Office and obtaining a Tax File Number and Australian Business Number.

“Your fund will then be required to lodge an annual tax return, have an annual audit prepared and pay an annual supervisory levy,” Mr Selvarajah said.

“SMSF trustees are required by law to prepare and implement an investment strategy for their fund and review it on an ongoing basis. It is not a ‘set and forget’ strategy.”

@keanemoney

Originally published as Property in self-managed super still makes sense, but know risks