We have written before about the fact that some parts of the property industry are not closely regulated – and unregulated property investment advice, from unqualified, sales focused ‘spruikers’ represents a significant risk for vulnerable investors looking to invest into Property via a Self-Managed Super Fund (SMSF)
The growing popularity of using an SMSF to borrow and use to invest in Property is being watched carefully by ASIC and the ATO – but there are still many property spruikers who encourage unwary investors to set up an SMSF and buy into a particular property scheme – which may be a serious risk for the investor and their retirement fund.
SMSF trustees are increasingly looking to property as an investment vehicle – in fact – residential property investment now makes up around 10% of all SMSF investments
..with property trusts and commercial property making up another 9% – meaning more trustees are shifting investment from cash and shares and into Property.
ASIC has real concern with spruikers, stating that ‘some promoters recommending real estate may be breaking the law’, as a licence is required to give financial advice, and even though property is not considered a ‘financial product’ – an SMSF is an investment vehicle – and so ASIC suggests they will ‘vigorously pursue those promoters who are unlicensed.’ See our article on how to spot spruikers.
Buying into these kinds of schemes via unlicensed property spruikers, where proper due diligence has not been professionally carried out, and the investor not properly informed of the risks, can be a recipe for financial ruin
The Reserve Bank via their Financial Stability Review said in regards to the rapid increase in property holdings within an SMSF structure, that ‘..this type of investment strategy is being heavily promoted. The sector therefore represents a vehicle for potentially speculative demand for property that did not exist in the past.’
Along with the regulators’ concerns with the increase in residential property investment, are the issues around using gearing in these investments
The role of Limited Recourse Borrowing Arrangements’ (LRBA) for example – which an investor can use to leverage any asset – including inside an SMSF vehicle – exposes new and significant risks for investors. Having a clear understanding of these risks, and having your individual circumstances properly examined by a qualified and licenced adviser is absolutely critical.
It is said by those qualified and licensed that LRBA’s do have a place within an SMSF, but it comes with benefits and risks that have been identified by the SMSF Professional Association of Australia (SPAA)
The potential benefits stated in the review were the capacity to leverage your superannuation savings, tax concessions and asset protection.
The risks listed were:
- Assets you or a related party own, generally cannot be purchased using a LRBA, and it must be a single asset
- Assets acquired under an LRBA cannot be changed to another asset type. Practically, it means that property alterations cannot be made if they fundamentally change the character of the property
- There are usually extra costs to set up a LRBA – as they for example require a separate trust to be established and separate legal documents.
- Loan repayments are required to be paid for from the fund – which means the fund must always have enough liquidity to meet the repayments
- Loan documentation and purchase contract need to be right. It has been found that some LRBA’s entered into by SMSF trustees were not correctly structured and documented – and this can mean very difficult and expensive remedies including the sale of the property
- Trustees need to consider if an LRBA is appropriate and consistent with the strategy of the fund and its members
- Tax losses remain in the fund, and so cannot be used to offset your taxable income outside of the fund
With the growing interest in using an SMSF structure as well as leverage into property for investors, the regulators are concerned for every-day Australian investors getting the wrong advice from property spruikers, and risking the financial security that superannuation was designed for.
With quite complicated and relatively new structures and investments available, ASIC, the Reserve Bank of Australia and the ATO all recommend investors seek professional and qualified advice before entering into this kind of investment
This is general information only – it is crucial that you get advice on the right purchase structure for you from a licensed and qualified financial planner.
To find out how you can build your property investments towards retirement – talk with us today. We are here to help.