Self Managed Super Funds.....& Profitable Property Investment!
Given the less than stellar performance of the majority of Australian shares held by most superannuation Funds on the ASX over the last five years, "bricks & mortar" investment property is now very much on the agenda of SMSF investors, especially after the ATO clarified most of the rules govening SMSFs borrowing to buy property.
SMSFS have long been allowed to use super fund monies to purchase the business premises used by fund members, and, since 2007, they can borrow, on defined terms, to buy residential property. Resently, the ATO also clarified the rules allowing SMSFs to increase the market value of a property held beneficially by that fund through "renovations and improvements"....which increased dramatically the types of investment property funds could acquire.
As a result, some industry experts are predicting many SMSFs will lift their exposure in property from around 16% at present, to possibly 25% or more within a year....especially as there are some excellent investment grade property opportunuties in the current flat Real Estate market.
Whether or not a [residential] property proves to be a good investment comes down to the real estate skills and knowledge applied during acquisition and of course the [required] investment strategy of the individual SMSF, as property, like shares, can loose value if not chosen wisely.
One potential benefit of using super funds to buy a property is being able to grow super from a lower base. Obviously, rental received combined with fund member contrabutions can accelerate reduction of outstanding loans on that property.
Perhaps the biggest attraction to property for a SMSF is that it can be sold free of capital gains tax once the members reach retirement age...or for as little as 10% of nett profit due for CGT if sold beforehand.....a considerable advantage over investment property held outside funds.
As previously mentioned there are a number of strict rules, with stiff penalties if broken. governing property purchases by SMSFs.
The property must be held until mortgage free by a custodion or holding trust known as a "bare trust". And, any borrowings through a bank etc must be through a " non-recourse" loan, [ usually requireing a more substantial deposit], so that in the unlikely event the property investment "goes sour", the lender has no recourse to the other assets held by the SMSF....only to that particular property. And,importantly, any residential property bought by the SMSF cant be used by a member of the Fund or a related party.
Obviously, choice of investment options and the control of ones own retirement savings, as well as fee savings paid to superannuation professionals by "traditional funds" are the main reasons for people opting to run their own SMSFs. But, cost effectiveness requires considerable responsability, knowledge and commitment for complience.
A SMSF is set up as a trust for up to four members which can include family. A member must also be a trustee. A trust deed is created to describe how the fund will operate, including the types of investments permissable and if borrowing by the SMSF is allowed.
As a trustee you are responsable for running the fund and protecting the retirement interests of each member. The rules ensure that all the funds assets, including the bank account are seperate from a members personal assets and that no monies are accessed by a member until legal to do so at retirement etc.
Trustees must never forget the purpose of superannuation is to ensure fund members are more financially secure in retirement . A SMSF fund is not to allow people early access to their money, or to buy things such as holiday homes that can be used for personal , not investment purposes.
Given the flexability and choice of investment options, including many property options ,the potential fee and tax savings etc, its little wonder SMSFs are rapidly gaining in popularity.
According to the ATO in 2011, some 7000 SMSFs are being established every three months with the 425,000 SMS funds currently in existance controlling about $420 billion in assets. This equates to around 40% of total funds under management by the entire superannuation industry.
Detailed information on all aspects of Self Managed Super Funds is available at www.ato.gov.au
DISCLAIMER. I am a licensed Real Estate Agent with a keen interest in the superannuation property investment sector. I AM NOT a licensed fiaancial advisor or practicing accountant so please, consult your preferred financial professional before relying on any of the above comments. Greg Sinclair. January 2012.