SMSFs shifting into residential property investment

Over the last four years funds invested in residential property by self-managed super funds (SMSFs) grew much faster than all other SMSF investments, according to figures published by the Australian Tax Office (ATO).

For clients with a long time horizon (in excess of ten years), an SMSF can be a very attractive way to invest in residential property.  For those who can wait until retirement before selling the property, or transferring it out of the fund as a pension payment to start using it, the gains can be tax-free under current rules.

However, there are concerns that inexperienced investors are being lured into buying property through an SMSF by property spruikers, without properly understanding the risks and costs of buying property, especially through an SMSF, and then making expensive mistakes in the process by doing the various steps in the wrong order.

SMSFs are only allowed to borrow to invest under special criteria and it can be easy and therefore very expensive to get it wrong. For example, it is easy for trustees to get the loan in the wrong name – especially where a bank is not the lender, or to pay the purchase price or deposit from the wrong legal entity and breach the SIS Act governing super funds.

There are also many parties typically involved including in borrowing to invest via an SMSF, including an estate agent, the vendor, the vendor’s solicitor, the fund’s conveyancing solicitor, loan broker, the lender, the lender’s solicitor, the fund’s solicitor, the custodian for the property, the fund’s accountant, the fund’s financial planner and the stamp duties office …twice (once on initial purchase and again once the loan has been repaid or the property sold).

Wise trustees appoint a loan champion to drive the entire process and help them navigate their way and ensure the steps are done in the right order. 

If you would like to discuss whether starting an SMSF is right for you, or whether to invest in direct property using an SMSF then please feel free contact our Partner – Wealth Consulting, Michael Rees-Evans, who is well-placed to advise you as an SMSF Specialist Adviso™ and a CERTIFIED FINANCIAL PLANNER® professional.

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