The role of property investment in SMSFs overstated.

The role that self managed super funds (SMSFs) are playing in the current surge in residential property prices needs to be kept in perspective, says Graeme Colley, Director Technical and Professional Standards, of the SMSF Professionals’ Association of Australia (SPAA).

Colley says despite all the market talk of SMSFs flooding into residential property, the actual numbers reveal it’s still a small percentage of the sector’s $500 billion in assets under management.

“At June 30, property in SMSFs consisted mainly of non-residential property such as commercial property ($58 billion) compared with residential property ($17 billion) out of total of $495 billion. At $17 billion, that’s 3.4% of all SMSF assets.

“In addition, gearing is not the issue its critics allege. According to ATO statistics, geared property in SMSFs makes up less than one half of one per cent (0.4848%) of their total investments.

“It would take a huge shift in investments to influence the real estate market compared with individual investors who use negative gearing to purchase property.”

Colley says SPAA welcomes the current debate because it highlights what SPAA has consistently said – that SMSF trustees need to get professional advice before using gearing to invest in property.

“Property is not an inappropriate investment per se, but it must be appropriate to the fund and consider the member’s circumstances, just like all investments whether they are via an SMSF or personal investment decisions outside superannuation.

“In a low interest environment people are looking for better opportunities for investing, a natural reaction to move out of a low earnings investment. Property is an alternative to interest rates on cash, fixed interest type investments and term deposits, and there are still fears about just how robust the sharemarket is.”

Colley adds that ASIC has said that all investments made by an SMSF, including property, requires advice from a licensed financial adviser. “This requires an examination of whether the investment is appropriate to the circumstances of the fund and its members.

“However, individuals do not require advice from a professional adviser to consider their particular personal circumstances before they invest in geared property. This means a higher risk is associated with the investment and the lenders experience a higher rate of default than the strict lending policies that are imposed on an SMSF.”

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Concerns about marketing of geared property investment strategies to SMSFs.

The SMSF Professionals’ Association of Australia (SPAA) fully supports the strong reservations expressed by the Australian Securities and Investments Commission (ASIC) about the aggressive marketing of geared property investment strategies to SMSFs.

Jordan George, SPAA’s Senior Manager, Technical & Policy, says: “There is a role for gearing in an SMSF – but only where trustees have access to bestpractice advice from an advisor who is licensed and properly qualified.

“In a recent speech to the Tax Institute National Superannuation Conference, ASIC Commissioner Greg Tanzer expressed concern that some trustees were not receiving such advice, simply reinforcing what SPAA has been saying on this issue for the past year.”

Tanzer said that ASIC was worried by the increase in the number of SMSFs that were being targeted by unscrupulous operators. In a broadside to those pushing the boundaries, he added that the regulator was taking a close interest in the issue. Any advisor recommending an investment for the trustees of an SMSF, including property, requires an AFSL.

George says SPAA has consistently maintained that the use of gearing as an investment strategy is complex and as such always recommends that trustees get professional advice.

“When this issue began to gather momentum last year, SPAA issued a detailed note to its members outlining the positives and negatives of gearing as a strategy. We nailed our colours on gearing by SMSFs to the mast and haven’t deviated since.

“That said SPAA believes it’s worth noting that despite all the ‘talk’ around this issue, it’s still only a strategy used by a small minority of trustees.

“In our view talk of SMSF gearing being ‘out of control’ is simply not borne out by the facts. At June 2013, SMSF statistics show that only 0.5% of SMSF investments have limited recourse borrowing arrangements, and that this investment category has grown at less than 2% over the past four quarters to 30 June 2013. This level of involvement has been confirmed by one of the big four banks.”

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