New reality for SMSF property investing

The subject of holding property in a self managed superannuation fund has become more complex.

For some years, holding property in a self-managed superannuation fund has become a popular strategy. More recently the subject has become more complex as the ability to buy property via an SMSF is approaching a perfect storm.

This is due to a combination of factors, notably changes to superannuation introduced effective from July 1, 2017, the fact that non-recourse lending is effectively being shut down by the large banks, and the correction presently being experienced in the residential property market.

As investors we recognise all property: residential, industrial and commercial, as an illiquid asset. It is a big-ticket item involving large amounts of committed capital and planning. Whether to sell and when to sell is an even weightier decision when there is debt attached to the asset, through non-recourse lending agreements.

One of the most common property accumulation strategies through an SMSF is for business owners to hold their commercial or industrial premises within their fund — and for the business to pay the landlord SMSF rent. Many SMSF investors are therefore a landlord and a trustee; their business is a commercial tenant.

Likewise, there has been a major increase in residential property being purchased through SMSFs as an investment by private investors who are not necessarily business owners

In these instances, the SMSF is typically the landlord of a rental property with the aim of a return being provided as SMSF income.

In both of the above instances, many investors have geared their SMSF property holdings.

When investing in property via an SMSF it is vital to keep in mind that you, as a fund member, are also a trustee and the purpose of an SMSF is to eventually provide you with an income stream in retirement. Any property purchased must be lettable and the potential income stream must be considered at the time of purchase.

The tax changes as introduced by the coalition effective on July 1, 2017 have also meant that investors should be aware of the possible impact of the new $1.6 million transfer balance cap per member.

The $1.6m threshold is relevant when considering the stage an SMSF beneficiary has reached. For instance, if a superannuant is in pension phase, the pension may be purchased up to the cap value, but with the following provisos:

● Potential issues arise with large “single” asset pensions over the cap if there are insufficient other pension assets to enable a commutation to bring the pension under the cap. For pensions with a substantial “single” asset position, the pension must have sufficient yield to enable the annual minimum pension payment and associated pension costs. A large single asset drawing down on capital may not be possible to meet this minimum payment.

● The government provided protection for pension assets being moved to an accumulation account to use the market value of the asset at June 30, 2017, as the new cost base for CGT purposes.

● The government provides protection for pension assets above the cap being returned to accumulation to use the asset’s market value at June 30, 2017, as the new cost base for CGT purposes.

The big banks have also effectively shut down limited recourse lending arrangements. This does not preclude the holding of property via an SMSF but it does make debt attached to a property (it has to be positively geared via an SMSF) now out of the question. So if a property purchase is to be considered in an SMSF, it typically needs to be bought outright.

If you hold property with an ­existing non-recourse lending ­arrangement, it was probably expensive to establish this arrangement in the first place, as well as the servicing costs looking at the interest rate payable versus what you would pay via other vehicles.

Will Hamilton is the managing partner of Hamilton Wealth Management.

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