‘Alarm bells’ ringing around leveraged property and SMSFs

There are “significant holes” in the Future of Financial Advice (FOFA) reforms, according to Tria Investment Partners, with the legislation failing to address issues related to leveraging property in SMSFs.

The availability of gearing in super brings property within reach of the average SMSF, and FOFA has created a “reinforcing remuneration incentive” to promote this strategy, said managing partner of Tria Andrew Baker.

“No wonder the distribution of real estate to SMSFs is becoming big business,” Mr Baker said. “FOFA leaves some holes big enough to drive a geared apartment through.”

While concerns about SMSFs and geared property have not previously been seen as an issue due to statistics that indicate modest exposure, more recent data from Multiport show there has been rapid growth in the gearing of real estate within SMSFs.

Australian Taxation Office (ATO) figures also show SMSFs are gradually increasing their exposure to commercial and residential real estate.

“Recent worries expressed by [Bank of Queensland] chief executive officer Stuart Grimshaw about the rapid growth of leveraged purchases of real estate by SMSFs... deserve some attention,” said Mr Baker.

“When a bank CEO – who after all is in the business of selling loans – rings the alarm bells about leveraged real estate and SMSFs, it flags potential problems which even incumbents need to keep in mind.”

David Cantley, general manager at Future Estate, raised similar concerns, saying SMSFs were not originally set up for the purpose of gearing.

“Traditionally, super is for retirement... You’re not meant to have lending against it, [because that] opens up a risk,” Mr Cantley told SMSF Adviser.

“There are advantages for gearing within super, but there are also disadvantages for it,” he said. “A lot of people have lost their super by not having enough hands-on knowledge about this.”

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