Michael Hutton

After years of increasingly restrictive limitations being imposed on superannuation, the tide has turned on the $2 trillion-plus industry, according to HLB Mann Judd Sydney wealth management partner, Michael Hutton.

Mr Hutton said recent Federal Budget announcements and the passing of some superannuation-focused bills in parliament last week have led to superannuation becoming more attractive as an investment vehicle in accumulating retirement savings.

Changes include those relating to concessional contribution caps, an increasing of the pension limit, work test amendments, and the ability for people to access super under the First Home Super Saver Scheme.

“While the changes are welcome, superannuation is not without limitation and some Australians should consider alternative options to complement their superannuation.

“For wealthy retirees in particular, the tight superannuation contribution limits have reduced the level of wealth they can accumulate in super and thus the amount they can draw in retirement.

“Wealthier families seeking to maintain their standard of living in retirement, and still be able to help their children financially, could seek an alternative strategy, such as the establishing of a personal investment company,” he said.

Mr Hutton said an investment company can receive a loan from the family, invest the funds, and pay tax on earnings at the company tax rate of 30 per cent. While this is higher than the superannuation rate, it’s lower than the highest personal marginal tax rate.

“Once in retirement, people can draw a pension from their superannuation fund, and any additional funds required can be drawn from their investment company. Because the money has been loaned to the company, the funds drawn out each year can be taken tax-free, and applied against the loan account.

“Alternatively, a dividend can be paid to family members with relatively low tax due to the attached franking credits. Unlike a pension-paying superannuation fund, you don’t have to draw money from the company. It can continually reinvest profits generated.

“An investment company is perpetual and makes an ideal investment structure for families looking to build and protect their assets for future generations,” said Mr Hutton.

HLB Mann Judd Sydney tax consulting director, Peter Bardos, agrees, and said families should review their investment structure periodically to ensure its continuing to meet financial goals.

“For example, there are rollovers available that assist in mitigating any tax cost of restructuring, particularly with funds being invested into a company.

“Also, previously, family trusts could enjoy the corporate tax rate while reinvesting funds. Stricter interpretation by the ATO however has resulted in trusts needing to pay these funds to corporate beneficiaries.

“We’ve seen a focus from the ATO on compliance with their interpretation in recent reviews, which is expected to increase with their expanding private group review program,” he said.

Mr Bardos said as a result of these developments, investment companies are increasingly being viewed by families as a simple and effective wealth management vehicle.

“There’s a number of benefits to be derived from having this type of structure in place, including access to the 30 per cent corporate rate (and the possibility of accessing the lower 25 per cent tax rate), discretion to distribute or reinvest some or all the income, and shareholders being able to receive franking credits on dividends.

“Conversely, there are some restrictions to this structure which people will need to carefully consider when weighing up an investment company vis a vis a trust structure. The main one is an investment company doesn’t attract a 50 per cent discount on capital gains made like a trust would.

“Ultimately, using a blend of a trust and company structure can often work well where investments, such as substantial capital growth assets or concessionally taxed assets, are invested in a trust and the balanced portfolio in the investment company. People should consult with a qualified adviser in determining which structure – or structures – are best suited for their current and future needs,” said Mr Bardos.

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Michael Hutton

With financial adviser numbers falling in the wake of the Royal Commission, the risk is that many Australians will miss out on financial advice, says Michael Hutton, head of wealth management at HLB Mann Judd.

“It’s both the best of times and the worst of times for financial advisers,” he says.

“The events of the past few years mean that financial planners will need to work even harder to ensure Australians don’t miss out on the advice and assistance they need.

“Many advisers are leaving the industry, for various reasons including education pressures, compliance burdens heightened by the Hayne Royal Commission, and the big banks closing down their financial advice arms in order to mitigate risk.

“As a result, we are seeing extensive fragmentation of the financial advice industry, with many advisers seeking new licensees or getting their own licence.

“The industry is in a state of flux and for those of us who remain, the transition is not an easy one.

“The silver lining to this is that, with fewer advisers around, those that embrace the new regime and do it well are likely to experience increased demand and see their practices grow.”

However Mr Hutton says that the most serious issue is that, as a result of the change and the fall in adviser numbers, many Australians are likely to miss out on financial advice.

“The most unfortunate outcome of all this is that people will find it more difficult to get personalised financial advice.

“The cost of providing advice is rising, making it challenging for advisers to run viable businesses unless they pass some of this cost on to clients.

“Meanwhile, the complexity of the financial environment, including tax and superannuation rules, is also increasing, making it more necessary than ever for people to get professional help to ensure they fully understand their situation and make the most of it.

“Good financial advice covers a wide range of wealth issues – super, other investments, interaction with tax, estate planning, cashflow planning, insurance needs, debt management, retirement plans, interaction with Centrelink benefits and so on.

“While almost everyone has a banking relationship, they will no longer be able to talk to their banks for advice.  Likewise, while superannuation funds are likely to be called upon to provide advice, this is likely to be general in nature, not specific, and limited to the superannuation side of a person’s wealth.

“And while there has been talk in recent years about the use of technology, and the rise of robo-advice, I don’t believe that technology can fill the gap.  Financial advice requires empathy, understanding and intuition, which technology – no matter how intelligent – can’t provide.

“The challenge for advisers is to find a way to repair the trust that has been damaged following the Royal Commission and show Australians the value of the advice they provide,” Mr Hutton said.

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Michael Hutton

A large lump sum payout from superannuation might sound good to most people, but there are circumstances when it is a serious problem rather than a welcome windfall, says Michael Hutton, wealth management partner at HLB Mann Judd Sydney.

In particular, it can be a problem for self-managed superannuation fund trustees and members, which tend to have higher member balances, he says.

“Because of the government’s decision to place caps on how much money can be held in pension accounts in superannuation, people are finding themselves in an unprecedented and unexpected situation where they suddenly need to withdraw a large amount from a super fund, and find another home for it, all in a short time frame,” Mr Hutton says.

Using the example of a couple sharing an SMSF, Mr Hutton points out that if one person passes away, the SMSF can only retain the amount that can be taken as a pension by the remaining member, which is capped at $1.6 million. Anything above this in the deceased’s member account will need to be paid out of the fund as a lump sum death benefit.

“The remaining SMSF member may struggle with this. It can be a big amount of money, and a big decision, to make quickly.”

Mr Hutton said it may sound like a strange problem to have but for many people, it can cause all sorts of difficulties.

“To start with, they are making decisions about significant amounts of money at a time when they are grieving and emotional.

“Making a sensible, long-term decision about what to do with this money can be very difficult at the best of times – and this certainly won’t be the best of times.

“Furthermore, they may never have dealt with this kind of issue before. Whether it’s because they have never received a lump sum of any kind, or whether it’s because they weren’t the person in the relationship who dealt with financial matters, this could be something completely unfamiliar and they may not have the knowledge or the skills to manage it.

“Taking money out of the established, well-regulated superannuation environment can be daunting.

“Another consideration that we are unfortunately having to think more and more about, is the issue of elder abuse.

“Receiving a significant amount of money, at a time of emotional vulnerability, could attract unscrupulous people – including family members – to try and take financial advantage.

“Sadly, this is becoming an all too common occurrence,” Mr Hutton said.

He says that as part of people’s retirement and estate planning considerations, they should think about what they would do if one person dies and the surviving partner needs to manage a significant payout from a superannuation fund.

“It may mean working out a strategy where the surviving partner knows in advance how they will invest any money they receive, so they don’t need to make decisions when it actually happens – for instance, dividing it equally between any existing investments in managed funds.

“Alternatively, they may decide to use the money to help out children or grandchildren – but this should be done as part of a considered plan that takes all financial aspects and requirements into account, not as a spur-of-the-moment decision at a time of emotional stress,” Mr Hutton said.

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Michael Hutton

While many people may appear to be wealthy, in reality their financial situation can be quite tenuous – it is important to take steps to build enduring wealth, warns Michael Hutton, head of wealth management at HLB Mann Judd Sydney.

“For example, if people are too dependent on the fortunes of a single asset, or their lifestyle is propped up by borrowings, the appearance of wealth can be quickly shattered.

“Many home-owners think they are wealthy – but they are possibly “asset rich” and “cash poor” and in some cases struggling to meet their recurring expenses. They are also vulnerable to falling property prices in the short term and rising interest rates in the medium and longer future.

“Not being able to repay credit card debt each month is often the first sign that your personal cashflow is in trouble.

“Being unable to manage a financial emergency without increasing debt or being forced to sell an illiquid asset, is another concern,” he says.

All investors should ask the following questions to ensure they are building good quality, sustainable wealth.

• Does your income exceed spending?
• Do you save money each month?
• Do you pay the full amount off credit cards monthly?
• Are you investing appropriately for your circumstances?
• Is your portfolio diversified?
• Do you have adequate insurance?
• Is your wealth accessible if needed?
• Can you cover expected expenses or loss of income over the next two years?
• Are you on track for a comfortable retirement?
• Have you consolidated your super accounts and checked its performance?
• Do you have a Will and other estate planning arrangements in place?

Mr Hutton says the way to build wealth is to spend less than you earn, save the difference, and do something meaningful with the money saved. “This could include making extra repayments on the mortgage or making regular deposits to an investment portfolio.”

He adds that any investment strategy should be appropriate for a person’s stage of life and circumstances. “An appropriate strategy for a 30 year old will look very different to one for a 50 year old.”

Time frames also impact strategy. “For any time horizon over five years, consider investing in a portfolio with a higher allocation to equities and property. These asset classes provide the opportunity for capital growth and higher yields but also come with more short-term volatility.

“However, if you are investing for a period of five years or less, there is not the benefit of time to ride out short-term market volatility so a portfolio predominantly invested in cash and fixed interest assets may be more appropriate.

“You can be “asset rich” but “cash poor” when too much of your wealth is tied up in illiquid assets, such as direct property or unlisted shares. This can leave you exposed if your income circumstances suddenly change and you can’t easily extract cash from these lumpy assets to cover living costs.

“It is also important to consider how assets are held, as this can make a significant difference to tax paid. This could mean, investing savings in the name of the lower income earning spouse, or putting more in superannuation.

“Finally, having adequate insurance and estate planning arrangements in place will ensure your wealth is protected and a legacy passed down to future generations.

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Michael Hutton

The changes to superannuation announced in the Federal Budget make superannuation less attractive and are likely to result in family trusts increasingly becoming part of investors’ arsenal, says Michael Hutton, wealth management partner with HLB Mann Judd Sydney.

“Many of the changes announced in the Budget make superannuation less attractive and less accessible for many Australians.

“The $500,000 lifetime limit on non concessional superannuation contributions is a massive change on the current allowable amount of $180,000 a year. This will severely inhibit middle-income earners who receive an inheritance or sell an asset.

“The fact that these changes apply from Budget night and dates back to 1 July 2007 is unprecedented. People looking to make a large non concessional contribution sometime soon have been blindsided.”

Mr Hutton said the quality of the ATO records will be a large determinate of whether these changes can be efficiently monitored.

“The ATO will very shortly be hit with requests from a few million of their best customers for a summary of non concessional contributions made over the past nine years. Let’s hope their records are good.”

Mr Hutton said the $1.6 million pension limit will be subject to some interesting industry consultation over the next year.

“This strikes me as administratively very difficult as daily pricing is not always available. It will lead to strategies like segregating assets so the best performers are in the pension part and worst performers in accumulation.”

He also raised questions about the structure of the $1.6 million pension account limit per person.

“Presumably this equates to $3.2 million for a couple. But what about the situation where one member has $4 million in super but the stay at home partner has $200,000. Is this disadvantaging that couple? Will there be any opportunity to equalize the accounts?”

Another issue to be addressed is what will apply with the death of a spouse.

“If one spouse died, and their death benefit pension is being paid to the other spouse, it is unclear as to whether the two pensions have to be reduced to $1.6 million in total.”

Reducing the concessional contribution limit for those over aged 49 from $35,000 to $25,000 is a retrograde step and will result in a significant reduction to the final super balance, Mr Hutton said.

“Our calculations based on a 50 year old working for a further 15 years with a current super balance of $100,000, who is now in a financial position to maximise concessional contributions – and would have been able to build a super balance up to over $1 million (assuming 7 percent earnings rate) – provide an interesting comparison.

“Under new rules she will build a super balance just short of $800,000, an amount that is more than a 20 percent reduction in her super balance.

“Even a final non concessional contribution of $500,000 will only increase the above super balance to $1.3 million, which would provide a retirement income of approximately $65,000 a year.

“It will be difficult for many people who are now reaching a point in their life when they can commence making larger super contributions to reach the $1.6 million pension cap.”

With further regulations and uncertainty over superannuation, family trusts will look increasingly attractive to many families, Mr Hutton said.

“With the rise in popularity of SMSFs in recent times, there has been a tendency for family trusts to be overlooked as a way of managing wealth.

“Yet family trusts have a number of advantages over SMSFs – and these advantages have increased with the budget changes – meaning they are a vehicle that may now make even more sense to manage family wealth.”

The advantages of family trusts over SMSFs include:

• Asset protection options;
• Intergenerational wealth transfer;
• No limit on contributions to the trust, and the ability to increase capital;
• Income splitting to all family members, giving substantial tax benefits particularly where there are low income earners in the family;
• No age limits to access funds;
• Ability to hold personal use assets, such as a holiday home;
• Ability to run a business through the trust; and
• Estate planning flexibility.

“Even before the federal budget changes, family trusts had far fewer restrictions and rules than SMSFs and were simpler to operate. Now they are even more so,” Mr Hutton said.

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Michael Hutton

Many Australians still do not see estate planning as something they need to focus on, and many don’t realise they may in fact have very significant estates, said Mr Michael Hutton, head of wealth management of HLB Mann Judd Sydney.

“The family home, superannuation balances and other assets, can all add up to a very valuable legacy – particularly in Sydney where the median house price is now over $1 million.

“Despite this, one in two Australians die without a valid Will, which means that when they die, their assets are distributed according to a set formula rather than in accordance with their wishes.

“A significant part of people’s overall wealth management process is to ensure that upon death, wealth is passed on to who they want it to go to, in an appropriate, tax effective and well-understood manner.

“People might also aim to protect their wealth from spendthrift beneficiaries, potential creditors of the beneficiaries and so forth. A good estate plan will ensure that this is achieved.”

Benefits of a well thought through and well documented estate plan include:

• Assets are passed to beneficiaries with an element of asset protection – for instance, protection from any legal or personal issues of the beneficiaries such as divorce
• The likelihood of litigation against the estate, by a disgruntled beneficiary, can be minimised
• Contingency planning – for instance a suite of documents can be put in place for use when a person dies or becomes incapacitated, by establishing power of attorney and power of enduring guardianship
• The opportunity to assess what is actually owned and who it should go to. Many people learn a lot about their financial affairs from going through the estate planning process.

“For example, jointly owned assets are an important consideration. It is not always understood that such assets automatically go to the surviving joint owner, regardless of what a Will says. This includes jointly owned property and joint bank accounts.”

Mr Hutton said another issue is that when estate planning is dealt with it is commonly addressed at a very low level.

“Often little thought is put into incorporating factors such as testamentary trusts in wills, even where the estate being left is very large.

“Testamentary trusts are a way of passing wealth to beneficiaries in a tax efficient, asset protected manner.

“Testamentary trusts are only formed upon the death of the testator and can be very flexible – or not, depending on the testator’s wishes,” he said.

Family trusts are another good estate planning tool. Because the family trust is a separate entity, not part of the estate, it does not die when the testator dies. Therefore family wealth can be built up and then passed on to the next generation intact without the portfolio of assets having to be sold and distributed.

This differs to a superannuation fund, which must be wound up once the member of the fund dies and has no financial dependent to leave the balance to. Therefore if superannuation is being left to adult children, then the fund account must be wound up.

Mr Hutton says that going through the estate planning process is also an opportunity to think about a legacy.

“People often start to think about whether there are any particular things they wish to be remembered for, such as supporting a particular charity or cause, or leaving money for grandchildren’s education or to help them buy their first house.

“Once people recognise these benefits exist, estate planning can actually become a rewarding experience in many ways,” Mr Hutton said.

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Michael Hutton

There is still far too much confusion about the role of superannuation, especially self managed superannuation funds (SMSFs), in estate planning warns Michael Hutton, head of wealth management at HLB Mann Judd Sydney.

“As a result, estates may not only end up paying unnecessary tax, but superannuation balances can also be distributed in a way a member didn’t want,” he said.

“Properly managed, in addition to its main role of helping ensure a comfortable retirement, a SMSF can provide excellent estate planning benefits.

“However, anyone leaving a large superannuation balance cannot rely solely on a Will to ensure their intentions are carried out. To allow them to implement the best strategy they must understand the tax implications of balances paid out to non-dependants, amend the SMSF Trust Deed if necessary, and have a Death Benefit Nomination as well as a Will.

“Unlike other assets, superannuation is held in trust and is not owned directly by the member of the fund. Consequently it usually falls outside the scope of a Will. As superannuation monies can represent a large proportion of a person’s wealth when they die, it is important to consider it in any estate plan. This requires understanding the rules and their implications.”

Mr Hutton said the trustee of a superannuation fund can pay death benefits to an estate or directly to a dependant, such as a spouse, a child, or a financial dependant.

“Some tax may be payable on distribution, although not if the recipient is considered to be a “death benefits dependant” such as a spouse, child under age 18, or a financial dependant. So whenever appropriate, superannuation balances should be paid to death benefits dependants to avoid unnecessary tax.

There are many estate planning options that can be taken with SMSFs that may not be possible with a public offer superannuation fund, Mr Hutton said.

“With SMSFs it is possible for death benefits to be paid as a pension to a death benefits dependant rather than as a lump sum, which means the fund doesn’t need to be wound up. The fund’s investment portfolio can remain intact and the lifespan of the SMSF extended – a benefit not always available with public offer superannuation.

“Arrangements can also be made to pay a SMSF balance to a specific beneficiary as a pension without giving them access to the capital. However, whatever a member’s intention is, the SMSF Trustee must make sure the Trust Deed enables the proposed strategy.

“Another SMSF benefit is that it can have up to four members, for example parents and two children. Such SMSFs can be a good tool to facilitate intergenerational wealth transfer tax effectively.

“To achieve this, parents who do not need all of their superannuation can take a pension out of the SMSF and gift it to children, who can then, within contribution limits, re-contribute it into the fund in their own name.

“Such planning can help in a number of situations such as allowing a family business property to remain in a family SMSF even after the death of a key member of the fund.

“Another advantage of a SMSF is that death benefits can be paid in-specie, meaning non-cash assets can be transferred direct to a beneficiary. This can be handy for unlisted or illiquid assets such as a property, or even listed assets such as shares. However, applicable stamp duty would be payable,” Mr Hutton said.

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Michael Hutton

Self-managed superannuation funds (SMSFs) have a number of benefits compared with other superannuation options but they aren’t for everyone, and people should carefully consider whether they are right for them before taking the plunge, says Michael Hutton, head of wealth management at HLB Mann Judd Sydney.

“SMSFs may offer more choice, control and flexibility, but they also demand more time, effort and responsibility.

“It is not a ‘set and forget’ option but one that requires an investment of time and resources in managing the fund.  Generally speaking, people should expect to be more involved and engaged with their superannuation when running an SMSF.

“Spending a bit of time thinking about what will be required of them if they establish an SMSF can save people money, time and heartache down the line,” Mr Hutton says.

Following are some basic ‘do’s and don’ts’ that can help people decide whether an SMSF is the right option for them:

Do:

•  have a good reason to establish an SMSF – don’t just do it on a whim.
•  get advice on the obligations of running a fund and its appropriateness for your circumstances.
•  consider having a corporate trustee.  The benefits almost always outweigh the costs.
•  think through who should be members – a maximum of four is permitted.
•  have a well-thought-through investment strategy.
•  purchase fund investments in the correct name, that is, the trustee/s.
•  use the contribution limits each year – otherwise the opportunity is lost.
•  keep administration tidy and up to date.
•  lodge tax returns on time – the ATO dislikes late lodgers. This is usually its first indication that all is not well with the fund and its management.
•  take advantage of the greater flexibility – for example, whether to start pensions or not and to make investment choices.
•  make use of ancillary benefits of an SMSF such as reviewing insurance options.
•  keep it reasonably simple.  Complication often does not enhance returns. For example, do have one bank account, not many, and one holder identification number (HIN) for shares.
•  integrate the SMSF with your business in terms of ownership of commercial property and rolling over of proceeds upon selling the business.
•  expect to be more engaged with you superannuation and more involved in what is happening.  This means investing time and resources in managing the fund.

Don’t:

•  start an SMSF with the expectation the money can be accessed sooner than otherwise allowable. The same accessibility rules apply to SMSFs as other larger funds.
•  have an expectation of getting a personal benefit from the superannuation investments – for example, a wine buff wanting to buy wine or an art lover buying art.  Some of these things can be done, but the complication involved can detract from the effectiveness of the fund.
•  expect to buy assets that can be used personally, such as a holiday house or a unit for children.
•  be lazy with investments, for example, just leaving funds in a cash account.  Make the fund work for you.

Mr Hutton added that people must also keep in mind that they are ultimately responsible for the governance and compliance of the SMSF, which is why members must also be the fund’s trustees.

“SMSF members are responsible for meeting all the superannuation and tax laws associated with their fund, and failing to meet these obligations can result in serious penalties,” he said.

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Michael Hutton

Rather than debating whether to let members have access to their superannuation savings for other uses, discussion should focus on encouraging additional superannuation savings, says Michael Hutton, head of wealth management at HLB Mann Judd Sydney.

“At some point in their lives, most Australians should think about making additional contributions into their superannuation, and consider when is the right time to do so.

“It is generally recognised that relying on compulsory superannuation contributions alone will not provide for a comfortable retirement for most Australians.

“It is a great shame that the constant tinkering with the super regime, and uncertainty created by the government around what superannuation can be used for, only adds to the doubt many people have about whether it is worthwhile to maximise their super contributions.

“The simple message should be that superannuation remains the most tax-effective and most sound investment vehicle for saving for retirement, and generally speaking, most people should consider making additional contributions at some point in their lives.”

Mr Hutton said there is no set age for when to start contributing more into super, and it depends on each individual’s financial circumstances, or financial life stage. Some common triggers include:

Mortgage under control

Paying off non-deductible debt such as a mortgage should be a priority, but once this is under control, other opportunities can be considered, Mr Hutton says.

“As a general rule, once the mortgage on the family home represents less than 50 per cent of the home value, the time is right to consider some other wealth building strategies in conjunction with continuing to reduce the mortgage.

“But reducing the mortgage by making additional repayments should be the first priority before looking to other wealth creation strategies such as super.”

Salary over $80,000

Once a salary reaches $80,000 or above is a good time to make additional superannuation contributions, as there are significant tax benefits to salary sacrificing additional amounts into superannuation (up to pre-set limits), Mr Hutton says.

“These benefits increase the more a person earns.  For example for a high-income earner with a salary of over $180,000 the tax benefit can be up to 34 per cent for additional amounts contributed to super.

Windfalls

Receiving a windfall such as an inheritance is another good time to consider making additional superannuation contributions.

“Many people will inherit money at some stage of their life and this is a good opportunity to put more into super.”

Business owners

There are special superannuation tax concessions for small business owners that allow the proceeds from the sale of a business to be placed into super.

“Subject to some very strict rules, up to $500,000 from the sale of a business can be put into super, above the non-concessional contribution caps, which can significantly build the balance of a superannuation account,” Mr Hutton says.

Contributions Caps

“Unfortunately if contributions limits are not used in a financial year, they cannot be carried over into the next.  Therefore plans to build super should not be left until just a few years before retirement.”

People still need to be very careful not to breach the contributions caps, despite the recent softening of the rules dealing with excess superannuation contributions.

These caps limit how much can be contributed into super each year and still access special tax concessions.  For those under 50 years, the total annual concessional contribution limit is $30,000 (including the compulsory contribution of 9.5 per cent), while for those over 50 the limit is $35,000.

“In addition, there are limits on how much can be contributed into super from after-tax money each year. By taking advantage of what are called the non-concessional (after-tax) contribution limits of $180,000 per annum (or a maximum of $540,000 over three financial years), a couple would be able to place over $1 million between them into super at one time.”

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Michael Hutton

The flow of money from self-managed superannuation funds (SMSFs) into residential property suggests many trustees have forgotten that the role of a SMSF is to fund retirement, says Michael Hutton, wealth management partner at HLB Mann Judd Sydney.

“People in retirement should be focussing on income over the medium term with enough capital growth to maintain income levels in the longer term.

“The basic fact is that residential property investment, particularly when the market is close to a peak as it must be now, has to be a long term strategy to get the capital gains sought.  The rental yield on such properties, particularly after expenses, is often very low

“Where gearing is involved, major cashflow problems can occur – particularly for those drawing a pension from their fund or expecting to draw a pension within the next several years.

Mr Hutton said that even younger trustees should consider very carefully whether holding residential property in a SMSF, rather than in their own name, is best for them.

“One of the attractions of property investments is the negative gearing tax provisions which are most beneficial to people on a high rate of tax.  SMSFs are either a low tax or “no tax” environment.

“Anyone still intent on investing in residential property as a way of accumulating wealth through capital gain (which should be the main reason for property investments) must recognise it is a long term investment and consider their own circumstances.

“They should also seek impartial advice and not rely only on the pitch of those interested in making a sale.

“As we’ve said many times before, SMSF trustees must recognise there are weaknesses in placing a large portion of their retirement savings in one asset.

“Property is usually an illiquid asset, which should be a key consideration for retirees funding their own retirement.

“If a significant amount of money is needed at some time in retirement – for instance to pay for a holiday, or to buy a car – people usually need access to cash in their superannuation.

“If they don’t have a mix that includes fairly liquid assets, they may need to sell the residential property owned by their fund, even though they only need a small percentage of its value.

“This can take several months, might not fit in with the trustee’s needs, and it may not be the right market to be selling in.”

Mr Hutton says there are other problems with the trend to gear up within an SMSF to buy residential property.

“Ideally retirees should be debt-free and have assets generating plenty of income to fund their lifestyle.

“Trustees of SMSFs also need to be mindful that upon the death of the last member, the fund must be wound up.  Illiquid assets such as property take time to sell, while transferring a property to beneficiaries in-specie will incur stamp duty and conveyancing costs,” he said. 

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