Getting real on property investment
Recently I wrote an article entitled “Batten Down the Hatches” about how to prepare your fund for the repercussions of any likely Government moves against SMSF.
Mentioned as a possible target was highly geared real property investments that constitute a large proportion of the SMSF assets. Who knows if these might be targeted? Given the average balance in most SMSF is $1 million, it would seem unwise to endanger the tax status of your fund with assets that may be considered “risky”.
Real Property and LRB
Specifically, will the Government of the day move against SMSF with Real Property and Limited Recourse Borrowings? To date the ATO has suggested that in any Real Property purchase, they consider a SMSF should have funds to pay for at least 10% of the purchase price. This would cover likely outgoings for purchase such as Stamp Duty and Legal Fees. It may also contribute to any cash shortage on the rental of the property.
If the purchase of Real Property by your SMSF requires a personal guarantee by members of the fund, does this show a lack of separation between the SMSF and members? It is a messy situation and in an ideal world, liability should stop at the SMSF.
Does this mean all Real Property Should be Avoided?
No, absolutely not. Lowly geared property, that is income earning, can be a very appropriate investment for a fund. This depends on the proportion of the SMSF assets held in property and the age of the members. The ATO is focussing on SMSFs with real estate property, though there is no need for concern if the trustees have been cautious. Remember also to ensure that real property is a possible investment of the fund, permitted under the Trust Deed and mentioned in the Investment Strategy.
What about units purchased off the plan?
It is difficult to see how these can earn income in the short term. What will happen when the unit has to be purchased and paid for? Will the SMSF have monies for that? What guarantee do you have the building will be completed and the appropriate unit made available for purchase? What if the builder/developer goes broke?
Valuation of Real Property
Do you consider your real property assets may decrease in value? There is no guarantee that the Australian property boom will continue. If real property is a significant proportion of SMSF assets and is highly geared, then if it drops in value, the SMSF may become insolvent. Depending on the location where the trustees buy real property, there may be a future oversupply, particularly of residential units.
The Right Advice
It is vital to both get and give the right advice regarding SMSF real property investments. We are always happy to give you guidance. Call 1300 551 261 to learn more or reply by email.
David Saul CA
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