Residential property simply wrong for most SMSFs: HLB Mann Judd Sydney

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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.

Michael Hutton

“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.

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

 18 September 2014