07 Feb Is A SMSF a Magic Bullet For Market Volatility?
Australian’s have always had a love affair with property. No surprise then, that a growing number of individuals are now setting up SMSFs with the sole purpose of purchasing investment property.
The concept of a physical asset strikes a chord with investors in the aftermath of the GFC and with the ability to gear into property – both residential and commercial – using a limited recourse borrowing arrangement, this trend is unlikely to slow or reverse itself soon (barring any legislative adjustments). The security which many investors experience as property holders must be tempered with the knowledge that property – while perhaps less risky than share trading – still holds an element of risk and that to think otherwise is not being realistic.
On the heels of a growing interest in buying through SMSFs, regulators have announced their concerns that individuals who set up an SMSF to purchase investment property on the advice of property spruikers or others with questionable intentions are being led down a dangerous path. Often, first time property investors are unaware of potential downfalls with leveraging property, therefore it’s imperative that anyone interested in buying property through their SMSF understands the risks.
What You Should Know
Positives
● Historically, shares and property have a proven track record of performing well over the long haul. Leverage is a way that smaller funds can get in on the action and enjoy more wealth creation opportunities.
● The less tax you have to pay the better. When it’s time to access the fund (during pension mode), the government has advised that it won’t tax earnings above $100,000 (as previously suggested) – great news when you’re ready to retire and need access to your savings!
Negatives
● Unlike a superannuation fund through your employer, you will pay set-up costs to establish a bare trust to hold your investment property.
● You’ll already be paying a low tax rate, therefore the benefit of negative gearing through your SMSF is reduced when compared to tax gains for the highest tax bracket earners. You’ll need solid capital growth to recoup your losses in a negatively geared SMSF property.
For example, a $100 tax deduction will only benefit the SMSF by $15 whereas an individual taxed at the highest marginal tax rate will benefit by $46.15!
● Smaller funds must pay careful attention to the property they purchase through their SMSF. Real estate can come with high transaction costs which can offset the balance of the portfolio.
● Property is not a liquid asset. It may not provide enough cash to cover the necessary pension payments therefore it’s a very risky choice for individuals on the cusp of retirement.
● Renovations to an SMSF property which has an LRB loan can be difficult to do as the lenders put restrictions on what can be done with the property.
While maintaining control of your own financial future is always a good thing and investing in real estate through your SMSF is a great way to grow your retirement, it’s not a “magic bullet” or “panacea” to volatility in the share markets. Such a thing does not exist.
Also, if you plan to or already have set up an SMSF solely to purchase investment property you might want to rethink your strategy. Seek out the advice of a financial professional who is well versed in the benefits and pitfalls of property investing through an SMSF who can help you make the right choice for your individual situation.
References:
Dos & Don’ts Of Property Investing | Leapfrog Women and .., http://www.womenandmoney.com.au/dos-donts-of-property-investing/ (accessed March 5, 2014).
University of New South Wales – bepress Legal Repository .., http://law.bepress.com/cgi/viewcontent.cgi?article=1229&context=unswwps-flrps10 (accessed March 5, 2014).