THE surge in Australians buying property through their self-managed super funds has prompted a warning from industry heavyweights.
Latest Australian Taxation Office figures show more than 1 million Australians are part of a self-managed super fund, and thousands of those have purchased property within their fund.
Thousands have jumped on-board the surging house prices to snap up property and help bolster their retirement savings, but this rush of activity hasn’t come unnoticed.
David Murray’s Financial System Inquiry advised the government to put a stop to SMSFs using limited borrowing recourse arrangements (LBRAs) to acquire property and other assets, which led to the value of the loans climbing from $497 million in June 2009 to $8.7 billion in June last year.
A LBRA allows an SMSF to take out a loan from the third-party lender, like a bank, and use the loan together with available fund to purchase a single asset held in a separate trust.
But the FSI report warned: ‘Further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system’.
Shadforth Financial head of advice John Barton said while buying property in super can be a good idea, it is case of putting too many eggs in the one basket.
‘You will be relatively poorly diversified, most people will already have a fairly big exposure to property, it’s not like property can’t go down,” he said.
‘I know an adviser who had a client who bought a property in Geraldton who paid $1.3 million for it and now can’t sell it for $400,000.
‘Property is not guaranteed to go up every year, you have a relatively low yield, you are lucky to get a yield much above the inflation rate.’
But the tax benefits remain appealing for SMSF members – any income received by an asset under a LBRA is taxed at the concessional superannuation rate, and if the fund is in accumulation phase, income received will be subject to no more than 15 per cent tax.
So an investor yielding $500 a week from a property purchased through their SMSF, the tax would be at 15 per cent instead of their typical income tax amount, ranging from about 20 per cent to 49 per cent.
The SMSF Professionals Association of Australia’s director of technical and professional standards, Graeme Colley, said the portion of Australians with DIY super funds who invested in property remained very small at just 1.3 per cent of SMSF trustees, but recognised there are risks to doing it.
‘If there’s a failure in the real estate market then that creates an unwarranted risk with your super fund,” he said.
‘If there is a drop in the value of those properties then trying to sell that property and be able to pay off the mortgage just from the sale itself may not be possible.
‘If you can’t rent the property out and you have multiple properties where are you going to get the money from.”
But the Mortgage and Finance Association of Australia’s chief executive officer Siobhan Hayden said buying property within SMSF can be a good idea if the risks are mitigated.
This includes the potential of reducing the loan-to-value ratio of buying property in an SMSF from 80 per cent to 70 per cent.