Specialist advice for trustees

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 various regulators – ATO, ASIC, APRA 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. 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 3.4% of all SMSF assets of $505 billion was residential. Over the past decade, 2012-13 was not a stand-out year for property investment. Leaving aside 2006-07 when there was a sharp 53% jump due to the one-off $1 million contribution cap and the introduction gearing, 2012-13, at 14.7%, was lower compared with 2007-08 (24.5%) and 2008-09 (18.3%), as well as the two years before 2006-07.

When it comes to debt – or, to use the technical term, limited recourse borrowing arrangements (LRBAs) – SMSF trustees have also been cautious. At June 30 this year ATO statistics show geared assets in SMSFs make up less than one half of one per cent (0.48%) 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, indeed, any 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 – that 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. This 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

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

SPAA encourages anyone seeking to invest in property via their SMSF to contact an appropriately authorised SPAA SMSF Specialist Advisor; they can explore if property is the most appropriate investment for them to help achieve their retirement goal.

Property is not an inappropriate investment per se; APRA funds all have asset allocations to property. But it must be appropriate to the SMSF and consider the member’s circumstances, just like all investments, whether they are via an SMSF or personal investment decisions outside superannuation.