Gearing pains ahead?

PORTFOLIO POINT: Any sign of a SMSF property gearing review? Let’s hope not. And what’s caused the super contributions slump?

There has been a flurry of “activity” in recent months about the ability of SMSFs to enter geared property investment arrangements.

Some of it has been because of alluring advertising in the media, often by property developers with all-in-one packages that include the property, the financing, the updated trust deeds and everything else you might need.

Other mentions have been warnings from commentators and SMSF specialists about the potential dangers of some of these schemes. And more still has come by way of a direct warning from the ATO (see The ATO’s super property crackdown).

But there has always been a threat hanging over the head of those SMSFs who have taken up the option, or are considering the option.

And that is because the government could change the rules at a moment’s notice.

Two years ago, the government announced that it intended to review all gearing in super funds, about now. There’s been no sign yet of an inquiry.

At the time, in response to the Cooper Super Review, the government said it would undertake a “broader review of leverage” across all assets of all super funds to make sure that gearing had not become excessive, or was in danger of placing super funds at risk. For more on that announcement, see here.

The major risk, as I pointed out then, was that Australia entered into a US- or European-style property crash. As it turned out, the government’s announcement roughly coincided with the most recent peak in the national property market. But while there was a gentle easing in capital city property prices for about 18 months following, property seems to have levelled out, and looks like it’s actually beginning to rise again.

There is plenty to be concerned about when it comes to SMSFs and property gearing.

One of the bigger concerns is the property development industry preying on young or naive SMSF trustees. I pointed this out back in August last year and I’m no fan of completely packaged developers’ solutions.

Geared property investment has its place. But if you don’t have experience with geared property outside of super, don’t make your SMSF a guinea pig. There’s simply far too much at stake.

But there are also many spruikers out there trying to lure in SMSFs with the promise of above-average returns. And that’s concerning many in the industry, including the SMSF Professional Association of Australia (SPAA).

The super gearing rules have been continually refined by the Australian Tax Office since they were a surprise introduction in September 2007. The rules seem reasonably settled and largely sensible now.

Most of the early questions have now been answered, including what’s repair/maintenance, which is okay, and what’s improvement, which is not.

Interestingly, at about the time that the government made its December 2010 announcement, property prices peaked in Australia.

Depending on which state you live in, prices fell between 5% and 12% in the roughly 18 months from the end of 2010. There appears to have been some recovery that started around the middle of this year.

The government’s super gearing inquiry is still likely to go ahead. Hopefully, it doesn’t ban all gearing in super, particularly property gearing.

Gearing isn’t right for everyone in super – far from it. It should probably really only be the domain of a relatively small percentage. But it is legitimate and it is a tool that should be available in the kit bags of SMSF trustees who understand the risks.

Super contributions on the slide - again

Super contributions sunk to their lowest level for two years during the September quarter.

It was the first time since December 2009 that contributions had actually fallen in seasonally adjusted terms. And the Financial Services Council (FSC) has put it down to a slower employment growth during the September quarter and also a 0.2% decline in real wages.

Its data crunching of Australian Prudential Regulatory Authority figures show that the actual fall was nearly one-quarter from June 2012 to September 2012.

Contributions dropped from $25.8 billion in June to $19.5 billion – a fall of 24.5%. However, last quarter super contributions are almost always higher, so a fall in September is generally expected. But even in terms adjusted for that June spike, contributions were down by 3.5%. The FSC put it down to economic and employment factors.

There’s every chance that we’re seeing the real impact of the final cut to the concessional contributions limit made on July 1, when the concessional contributions limit for the over 50s was finally cut from $50,000 to $25,000.

At the May 2012 federal budget, the previously announced 50-50-500 policy (see 19/5/2010) was pushed back by two years, meaning all eligible Australians would have the same concessional contributions limit of $25,000.

It is only one part of a broader pattern. It was the fourth consecutive year-on-year decline in member discretionary contributions. That’s right. In each of the four quarters to September 2012, the amount of money you were prepared to put into super fell over the previous comparable period.

Over the year to September 30, 2012, member voluntary contributions fell 6.3%, or more than $1 billion. Comparing the September quarters of 2011 to 2012 was even more startling, with a fall of $3.6 billion, or 13%.

Tell me, if you’ve dropped your contributions. Was it because of economic and/or workforce factors? Or were the reduced concessional contribution limits playing a part? Shoot me an email (bruce@castellanfinancial.com.au).

The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au

• SMSF specialist law firm DBA Lawyers has reminded SMSF trustees to follow best practice around deeds. There are many different requirements for an instrument to be a deed, depending on which state of Australia’s jurisdiction applies, specifically around what is required for it to be deemed as “sealed” and “delivered”. DBA said because “you never know in what jurisdiction a deed might ultimately be litigated”, then it is best practice to have an independent witness and the words ‘executed as a deed’ and ‘signed seal and delivered’ appear when an individual signs a deed. “Where a company signs, it is best practice for the company to have a secretary and for the words ‘executed as a deed’ to appear.”

• The final SMSF auditor competency and registration requirements have been released by the Australia Securities and Investments Commission. Registration begins from January 31, and the new requirements for registration come into force from July 1 next year. “These standards are based on pre-existing standards issued by The Institute of Chartered Accountants in Australia, CPA Australia and the Institute of Public Accountants, which also apply to members of the Superannuation Professionals’ Association of Australia Limited, thus ensuring continuity in requirements for most SMSF auditors,” ASIC said.

• With the new SMSF auditors regulatory regime set to start with the next financial year, the SMSF Professionals Association of Australia accreditation has been recognised as an approved audit qualification. SPAA CEO Andrea Slattery said the decision was a win. “The SSAud designation … has always been about raising the bar to the highest possible standards for auditors in the SMSF sector, and the Government has duly acknowledged this,” she said. SPAA also said it welcomed the final competency standards for auditors and was pleased ASIC had taken on board SPAA’s suggested improvements for the draft standards.