Although investing in property through a self-managed superannuation fund is a popular option for many trustees, the tighter bank lending environment and increasing regulatory interest are making this option much tougher.
There are now significant practical and technical challenges for advisers, due to the unwillingness of banks to lend for SMSF property purchases using limited recourse borrowing arrangements (LRBAs), says Mark Ellem, executive manager, SMSF technical services, for SuperConcepts.
“As advisers, we usually focus on the technical points, but now you also need to consider the practical issues, such as the funding availability and options for using different structures if [funding] is not readily available,” Ellem says. “Advisers need to consider what happens if the SMSF enters into a purchase contract but can’t get funding, especially in the current environment with tighter bank lending. Complying with the rules may be straightforward, but what if funding or the lending product itself are not available to your client, what do you do?”
Citing a case study based on his own SMSF’s attempt to secure funding for a property purchase, Ellem says, speaking to Professional Planner about his upcoming appearance at the SMSF Association Technical Roadshow that banks were now throwing up significant roadblocks and barriers to SMSF borrowing for property purchases.
“Whether you can you get the finance should now be one of the first issues an adviser highlights to clients when discussing the idea of using an SMSF to purchase property – particularly if they are interested in using an LRBA,” he asserts. “There is no single ‘right’ model for purchasing a property within an SMSF and advisers increasingly need to think about the different options. They should also review a client’s plans to ensure they are not just setting up a compliant structure, but also one that considers other significant issues.”
Ellem says the recent regulatory interest in low balance SMSFs by both the Productivity Commission and the Australian Securities and Investments Commission highlights the need for SMSF advisers to study the structuring of SMSF property investments carefully.
“For advisers, there are important questions to consider if someone with a small amount in an APRA-regulated fund wants to start an SMSF to buy their business premises,” he says.
The changing regulatory environment may make it necessary to consider structures other than an SMSF to achieve the client’s goal.
“You also need to think about how you can get property into an SMSF, given the new, lower contribution caps and limits – especially the total super balance restrictions,” Ellem noted. “The situation is further complicated if the SMSF member has a debt over the property. You need to consider how they plan to pay off the debt and fund that payment before moving the asset into the SMSF.”
Large, illiquid assets like property also necessitate a careful review of potential exit strategies.
“Advisers need to look forward to potential life events that may affect the fund’s members,” Ellem says. How will the fund handle it if someone is looking to get out of the fund, voluntarily or involuntarily?” Ellem asked. “Have the trustees considered the tax consequences of the transfer balance cap? How will the fund pay out death benefits if there are lots of illiquid assets in the fund?”
The liquidity problem is particularly significant, as it has the potential to affect other members of the SMSF.
“If you need to make a pay out, do you have a fire sale?” Ellem asked. “What are the other options?”