Guiding SMSF trustees through borrowing and residential property investing

An increasing number of self-managed superannuation fund (SMSF) trustees and members looking at investing in residential property are seeking clear information on borrowing, and how residential property fits within their portfolio.

Many of these, however, who do not obtain specialist advice, remain unaware of the potential tax implications and penalties that may be incurred.

Analysis undertaken by Perpetual Private Clients and Capital 360 estimates that approximately 15 percent (or around $34.2 billion) of SMSF’s existing allocation to cash and shares will be redeemed to acquire property over the next few years.

With this in mind, Perpetual Private Clients and Capital 360 are holding education workshops to help investors understand the legislative requirements and portfolio considerations of gearing to invest.

Mr Chris Balalovski, senior manager strategic advice at Perpetual Private Clients, says that they have seen a noticeable rise in the number of clients seeking advice and strategic guidance on borrowing arrangements in SMSFs.

“With recent legislative changes, more SMSF trustees are considering borrowing to invest in property. However, putting the right strategy and structure in place is a complex process, so trustees need to ensure they understand the legislative and compliance requirements.

“Firstly, it must be established that the trust deed allows a borrowing. The strict rules then state that the borrowing must be in line with the fund’s investment strategy and take into account the future financial needs of all members. Failure to do so may result in a fund becoming non-complying and losing its tax concessions. It’s also important for trustees with existing arrangements to have their deed reviewed to ensure they comply.

“When people seek our guidance, we find the most commonly neglected elements are the nature of the holding trust (which has the custody over the property) and the details of the loan documentation. The result of this could mean unexpected stamp duty and capital gains tax liabilities,” Mr Balalovski said.

Mr Sean Preece, executive director of Capital 360, said that trustees should also take into account the time to retirement and income requirements of their members in order to find the right property for the fund to invest in.

“Investors in property need to take the same analytical, unemotional approach to their property purchase as they do to any other asset class, such as shares or bonds to ensure they achieve the right mix of diversification, return and capital growth in their property investment.

“It is worthwhile taking the time and effort to get it right, as historically residential property has delivered solid, reliable returns over the medium to long term, and can add significant value to an investment portfolio,” Mr Preece said.

The workshops will be held in Sydney on Saturday 30 October 2010 and Melbourne on Saturday 13 November 2010. For more information, or to register, visit www.capital360.com.au/perpetual.