Clients at risk in property sector

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Expectations of rising property prices and 54-year low interest rates are among incentives for SMSFs to invest in properties, including commercial – which could come with a higher risk. Gunilla Haglundh reports:

Recent figures from the ATO indicate that SMSF direct investment in property has risen by 62% to $66.6 billion over a four-year period.

This has prompted ASIC to express warnings that it does not want SMSFs to “become the vehicle of choice for property spruikers”.

“I’ve noticed that over the last 12 months I’ve received more inquiries from real estate agents asking if we have clients who are ready to invest in a block of units,” said Christian Beltrame, financial planner at BKM Financial Services.

It’s not unheard of for investors to buy an apartment at an auction on a Saturday, and then contact their accountant on Monday, saying they want to set up an SMSF.

“I’m not really concerned about the type of property, rather, more concerned about diversification and borrowing beyond their means. Diversity, liquidity and investment risk has to be discussed by the trustees,” said Beltrame.

Brent McCartney, partner at DFK Benjamin King Money, says this sort of behaviour is “far from ideal”.

“It’s crucial to talk to an accountant about tax and structuring and a financial planner about cash flow, investment risks, diversification and estate planning.”

It is generally considered that residential properties are easier to rent out than commercial properties, therefore those investments could come with a higher risk.

Often the fund buys the commercial property where the trustee has their business, so the business pays market rent to their SMSF. The fund then pays concessional superannuation tax on the rent, but is able to claim that back through its normal tax deduction. This is also a good estate planning tool.

However, if an SMSF is not able to rent out a property for some reason and depends on the rent to pay the mortgage, it can come under financial stress.

“It’s important as well to know that the SMSF can only initially borrow money to purchase the property and not to substantially improve it,” said McCartney.

Above all when considering borrowing to acquire property, consideration of all of the clients circumstances should be undertaken as it may be more tax effective strategy outside superannuation, in their own personal name.

If the interest rate came down further in August, it’s reasonable to assume that ASIC will reiterate their warning and demand that the SMSF sector of Australia follow its compulsory investment strategies. There is however, no superannuation law that can forbid a fund to invest in a high-cost or a high-risk property.

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