Super property builds momentum

PORTFOLIO POINT: Investors looking at property for their super fund should be aware of both the cons and the financial advantages.

Years ago I wrote about the self-managed super fund (SMSF) market and how it was likely to explode, and that its evolution would have an impact on the property market as well as the financial planning industry.

Those things have certainly come to pass, and over the past four years the value of residential property being held in SMSFs had grown from $10.82 billion (at June 2008) to $14.87 billion by March this year, according to Australian Taxation Office data.

Up until recent times, many people had been turned off by the thought of having to look after their own superannuation accounts.

However changes five years ago to superannuation legislation in relation to geared investments in real estate have moved the playing field. And, while it’s taken a little while for investors to catch on, financial planners are increasingly reporting significant interest from their clients about how to buy an investment property using their super.

This recent interest has raised some concerns from the “big boys” such as ASIC, which is worried that some unscrupulous spruikers will try and fleece superannuation property investors. ASIC is so worried it is sending out officers to investigate certain players in the property investment space. And fair enough as well. At present the gate is wide open for the untrained to be financially slaughtered. Think of the two-tiered property marketing scams and you will get what I mean.

ASIC is also worried that investors will put all their superannuation eggs into one basket and that basket could then be easily wiped out, adding to the future burden of pension liabilities.

So, despite the risks, why all the interest from investors? Well, there is much to offer.

For example, any capital gain on a property inside superannuation is taxed at no more than 10%. In addition, if your property is cash flow positive the net income is charged at no more than 15%. That’s great for commercial property investors who generally own positive cash flow properties.

On top of this, it is possible for super funds to borrow up to 70% of the value of the property. And last year, the ATO issued a ruling allowing for deductions on value improvements to a SMSF property.

Set-up costs have also come down, and now average around $5,000. So this works for funds that have $200,000 in cash or more.

Also for those worried about being personally sued at some point in their lives, an SMSF has been known to offer some protection benefits.

Sounds good, doesn’t it?

However, on top of the potential scams one should also be aware of other drawbacks. For example, while negative gearing can apply, it will only apply to the other income earned in the fund. You can’t offset the negative gearing benefits against your personal income.

And you should also be aware that you can’t live in the property until you retire, or have your family and friends using the property. The ATO and others are looking closely at this. Perhaps the play here is keep you negative cash flow properties under your name and the positive cash flow ones under your superannuation fund.

I think too it’s important to recognise that superannuation isn’t about a tax break. It’s about ensuring you have enough money to live comfortably in retirement. I have concerns about those who already own real estate and then decide to gear up further into a single asset class using this vehicle for long-term savings. Where is the diversification here? If there was a property crash at some point in time, you potentially could be totally and utterly wiped out.

In the end, this really does boil down to your own personal financial circumstances and goals. And with that, one should really seek the advice from an independent financial planner or accountant that doesn’t have a potential conflict of interest in this space.

Louis Christopher is managing director of independent property advisory and forecasting research house SQM Research.