Residential property in SMSFs a concern for retirees: HLB Mann Judd

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HLB Mann Judd Sydney has expressed concern at the reported increasing appetite for investing in residential property through SMSFs – especially when trustees are retired.

Michael Hutton

Michael Hutton, HLB Mann Judd Sydney’s head of wealth management, said that there are a number of problems in having a large portion of superannuation savings tied up in one asset.

“It is bad enough having a major bias in a portfolio towards one asset class, but having one dominant asset brings increased risk.

“Property is usually an illiquid asset, which should be a key consideration for retirees who generally require good cashflow.

“For example, if retirees need a significant amount of cash – for instance, to make pension payments – having to sell a property to realise this cash is not an ideal outcome.  It can take several weeks, if not months, to sell property, and it may not be the right market to be selling in.

“Furthermore, property investors need to factor into their budgets that there will be times when repairs and maintenance bills are high or when the property is untenanted and therefore not generating income for them, which again impacts on cashflow,” he said.

Mr Hutton said other issues include:

·      Carrying debt – ideally retirees should be debt-free.  Carrying debt, especially if it is not fixed, is a risk.  Property investors who do their sums on today’s interest rates could be in for a rude awakening in three or four years time

·      Poor yield – investors in residential property are usually seeking capital gain over time, which is not necessarily a sensible scenario for retirees.  There are better yields elsewhere

·      Demands on owners – while trustees can appoint an agent to manage their property, there are always decisions to be made, and direct property places greater demands on trustees.

Mr Hutton added that all property investors should be particularly concerned when they are introduced to property investments through spruikers or those running seminars.

“It is easy to get carried away with the attractiveness of properties presented in this way but they are rarely bargains and carry additional charges such as sales commissions built into the buying price.

“Unfortunately, we are starting to see a rise in such property spruikers who are promising fantastic returns on property for SMSF investors.  Usually, it requires investors to take on a big debt to fund the purchase, which may not be a good strategy for them at, or close to, retirement.

Mr Hutton also pointed out the tax liabilities of holding property in an SMSF can be significant.

“An SMSF must be wound up upon the death of the last member and paid as a lump sum to beneficiaries or the estate. Even if the family wants to keep a property by transferring it out of the SMSF, it will trigger stamp duty costs.

“So while it may make sense for younger SMSF members to hold (for example) business premises in a fund, it may not be so sensible for a 75 year old to still be invested in real estate through their SMSF, particularly if it is geared,” he said.

Mr Hutton said that one of the situations where holding property in an SMSF can be beneficial is for business owners.

“It is a great way of getting funds out of the business in a tax effective way by paying rent to the superfund rather than some third party landlord, as well as being one of the few ways to utilise superannuation investments in a business.

“The key point is that holding property in an SMSF has to make sense from investment, tax and income perspectives, not simply because people think property is the hot asset class of the moment.

“Often geared property investments are extremely tax effective even when held by an individual. Going through the extra hurdles, and cost, of satisfying the superfund borrowing restrictions may not be worthwhile compared to holding the property personally,” Mr Hutton said.

HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and a member of the HLB Mann Judd Australasian Association.


For more information please contact:

Michael Hutton – Phone: 02 9020 4193