Investors must be careful not to let the desire to invest in property override good investment sense
Search the internet with ”SMSF” and ”property” and it becomes obvious that a section of the property industry regards the growing number of ”do-it-yourself [DIY]”, or self-managed, superannuation funds as potentially rich pickings.
There are hundreds of hits from property investment schemes where the tax advantages of holding property in a DIY super fund is touted as an opportunity not to be missed. Sometimes they are providing the whole package – the DIY fund, the property and the financing. There are seminar invitations saying investors could potentially double their super balance within a few years by buying property through a DIY fund.
Investors must be careful not to let the desire to invest in property override good investment sense, says Philip La Greca, head of technical services at AMP SMSF administration.
”Investing in property through an SMSF should be considered with the same unemotional approach that you would take with any other asset investment,” he says.
The property investment schemes are largely unregulated, or jurisdiction is shared by regulators.
Real estate is not a financial asset and is not covered by the Corporations Act – and real estate laws are with the state and territory governments.
There has been a noticeable increase in property schemes since the superannuation rules were changed five years ago allowing DIY funds to borrow and invest in property. Before then, only property that was owned outright could be held in DIY funds.
Property held inside a DIY fund can be a very good investment if done properly. But it is the hard sell from unlicensed property investment schemes that is creating growing concern among regulators.
Senior officials at the Australian Securities and Investments Commission (ASIC) have been sounding the alarm bells in recent months. ASIC Commissioner Peter Kell told a parliamentary committee recently that DIY funds were on the regulator’s radar screen. He said the regulator was concerned about marketing activities and the promotion of direct property through SMSFs.
ASIC is going to have more to say next month on what is a reasonable amount of money to have before starting a DIY fund, trends in the promotion of direct property through DIY funds, and regulatory issues.
More lenders are providing special types of loans called ”limited recourse” mortgages that are required for anyone borrowing to invest in property through a DIY fund. If the borrower defaults, lenders only have recourse to the property and not any of the other assets in the DIY fund.
Many lenders require a financial planner or accountant to have signed off that they have advised the DIY fund trustees on the investment before approving the loan – however, it is not a legal requirement.
The tax office, which regulates SMSFs, is also concerned about the growth in promoters of property investment to DIY funds. The Tax Office said last year that some trustees were using their superannuation funds to invest in property without fully understanding their legal obligations, or were deliberately flouting the law.
Breaches of the law can result in a fund’s trustees being disqualified, facing civil penalties of up to $220,000, or even criminal charges. La Greca says geared property is not held directly in the fund but in a holding trust, which is a separate legal structure with the SMSF as the ”beneficial owner” of the property. He says correct sequencing is crucial. It is very important, for example, that the SMSF is commenced prior to the signing of the contract of sale for the property.