SMSFs look to residential property

self-managed super funds SMSFs smsf trustees SMSF capital gains

21 October 2010
| By Caroline Munro |

About $32.2 billion worth of cash and shares in self-managed super funds (SMSF) is set to be diverted to residential property, but a lack of advice could incur penalties, according to Perpetual Private Clients and Capital 360.

Perpetual Private Clients and Capital 360 stated that more SMSFs were looking to invest in residential property, but there was a lack of knowledge around borrowing and how residential property fits into a portfolio. According to their estimates, approximately 15 per cent of the existing allocation to cash and shares of SMSFs - worth about $34.2 billion - would be redeemed to acquire property over the next few years. However, many SMSF trustees did not seek specialist advice and therefore were not aware of the potential tax implications and penalties that may be incurred, they stated.

Senior manager strategic advice at Perpetual Private Clients, Chris Balalovski, said recent legislative changes had led to a “noticeable” rise in the number of clients seeking advice and strategic guidance on borrowing arrangements in SMSFs.

Balalovski asserted that trustees needed to ensure they understood the legislative and compliance requirements.

“Firstly, it must be established that the trust deed allows a borrowing. The strict rules then state that the borrowing must be in line with the fund’s investment strategy and take into account the future financial needs of all members,” he said. “Failure to do so may result in a fund becoming non-complying and losing its tax concessions. It’s also important for trustees with existing arrangements to have their deed reviewed to ensure they comply.”

He added that the nature of the holding trust, which had the custody over the property, and the details of the loan documentation were commonly neglected.

“The result of this could mean unexpected stamp duty and capital gains tax liabilities,” Balalovski said.

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