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Specialist advice for trustees

Liz Ward 3 minute read

The debate that is swirling around self-managed superannuation funds and residential property investment deeply concerns the SPAA on two fronts

Firstly, much of the criticism of self-managed super fund (SMSF) trustee investment in residential property is ill founded. Secondly, the SMSF Professionals’ Association of Australia (SPAA) believes that once the true numbers are published, it will fundamentally show that the funds’ investment in property continue to be small in comparison to other investment classes.

There can be no doubt the property market spruiking that’s occurring is unnerving the regulators and professional organisations.

At various times over the past few months, the regulators – Australian Taxation Office (ATO), Australian Securities and Investments Commission (ASIC), Australian Prudential Regulation Authority (AP ) and Reserve Bank – have entered the debate to warn about this phenomenon. Associations such as SPAA have also expressed concern over the gearing of property in SMSFs.

In particular, it was the Reserve Bank in its Financial Stability Review that really sparked the debate. In its overview, it said: “Changes to legislation in recent years have permitted superannuation funds, including SMSFs, to borrow for investment, including property. Since then, property holdings have increased and this type of investment strategy is being heavily promoted.”

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The sector therefore represents a vehicle for potentially speculative demand for property that did not exist in the past.

Cautionary investing

The evidence to date suggests SMSF trustees are cautious investors when it comes to property.

At June 30, SMSF property assets were $75 billion, of which only $17 billion or 3.4per cent of all SMSF assets (of $505 billion) were residential.

Over the past decade, 2012/2013 was not a standout year for property investment. At 14.7 per cent, 2012/2013 was lower than 2007/2008 (24.5 per cent) and 2008/2009 (18.3 per cent), as well as the two years before 2006/2007.

When it comes to debt – or, to use the technical term, limited recou up just 0.48 per cent of their total investments.

New figures might change this investment outlook, but we remain confident that trustees will continue to invest prudently, especially where they enlist the support of an SMSF specialist.

The role of SMSF specialists in this type of investment is, for many trustees, a critical element in overseeing their SMSF. In this one respect, SPAA welcomes the current debate because it highlights what we have consistently said – SMSF trustees need to get professional advice before using gearing to invest in property where they lack the appropriate skills.

It is important trustees understand that ASIC has set clear guidelines on the need to get advice about property investment.

To quote the regulator: “A person requires an AFS licence if they recommend that a member of an SMSF purchase a property through their SMSF.  is is because the vehicle through which the underlying investment is made is an SMSF and an interest in an SMSF is a financial product. It does not matter for licensing purposes that the underlying investment (real property in this case) is not a financial product.”

Practical terms

If a mortgage broker is approached by a client about using an SMSF to invest in property, the mortgage broker is required to enlist the services of a professional adviser who is licensed to provide financial product advice. In other words, that adviser has to be operating under an Australian financial services licence (AFSL) as a licensee or authorised representative.

Property is not an inappropriate investment per se – AP funds all have asset allocations to property. However, it must be appropriate to the SMSF and consider the member’s circumstances, just like all investments.

 

Specialist advice for trustees
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Liz Ward

Liz Ward

Liz Ward is head of education services at SPAA

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