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‘Risky’ negative gearing in super slammed
Negative gearing causes “excessive risk” and is inappropriate in a superannuation environment, Tria Investment Partners has warned.
Tria’s managing partner Andrew Baker told SMSF Adviser that negative gearing maximises risk-on assets which are already risky, and could cause “catastrophic” losses within SMSFs.
“We have already seen plenty of examples of catastrophic losses with SMSFs where members have got [themselves] into heavily geared property schemes,” he told SMSF Adviser.
“It just introduces excessive risk… there are certainly sensible strategies but it is far too easy for them to go wrong,” he added.
Mr Baker said it was a “big mistake” to permit SMSFs to borrow following policy changes made by the government.
“[It] basically opened the dam gates to essentially allow any kind of borrowing on any kind of asset, which led us to where we are today,” he said.
“It is an area of concern because this is where you tend to get losses arising from when you combine gearing with real estate or exotic assets.”
Also speaking to SMSF Adviser, AMP chief economist Dr Shane Oliver said negative gearing only works if you “eventually” make a profit from your investments.
“You are not going to make any money if you are constantly losing a lot of it,” he said.
I haven't seen any "catastrophic" losses as those funds that have invested this way have been well thought through and executed. I am sick of this scar mongering.0- SMSF could invest in geared assets long before LRBA's - they had access to managed funds and various other listed & non listed investments that had internal gearing. However Australians love property.
What this change has really done is finally get the average Australian to care about super, the benefits and finally to look at their statement each year.
While any form of gearing contains risk, the biggest positive out of this change is to see people setting up SMSF's and NOT leaving their money in cash. I think this is a bigger issue than 'gearing in SMSF'.0 - Tim
Are you suggesting all property investors are limited to 50% LVR? Makes no sense!0 - So guys are we going to stop all the home owners who buy their home with 90%, or 95% gearing. Shouldn't we be protecting them also? Lets tell them that they cannot gear their first home purchase to greater than 50%. An investment is an investment, it can be in super, individually, in a partnership, company or discretionary or unit trust. It is about time we stopped this ridiculous idea that a superfund is something special. A superfund is another structure not a product. It is this idea that a superfund is a product that is causing all these problems. It is not it is a structure. So if you can invest legitimately in another structure in that manner then you should also be able to invest in that same manner in super. If everyone realised this then all these self-interested comments and attacks on SMSF could cease and proper discussions could be had about the merits of investing in super and why people invest in SMSF as against investing in other structures.0
- Any person who invests in assets which looses money every year (negative gearing) and the underlying asset does not grow in value has only himself to blame - as the reason why the asset does not grow in value is because he paid too much for it or the asset is of not good quality.
I have seen SMSF's which due to borrowing have grown 30% per year or more, including my fund which invested $100K (borrowed the rest) in a property in blacktown which has grown by $100K in one year - a 100% growth.
In my opinion borrowing is the best thing which happened to SMSF - at least now they don't have to wait for the Govt handouts till age 70 - which may even be moved even further till most of them get to that goal post.
Before sending these warning bells out - it will help if you look at clients outside your office - tell your clients to buy wisely - that is the key - and not how you fund the purchase.0 - Andrew you are right of course that the structure does not change the underlying risk but I think we have to be mindful that SMSFs have enemies and when the next inevitable property downturn comes and some of the people who bought at the top lose their money and go on Today Tonight and ACA there will be a push to ban LRBAs completely cutting it off from people who used it sensibly. So best to get in front of this and wind it back to something more conservative to minimise this problem0
- LVR should be capped at 50%, perhaps even less. Ridiculous that people can gear to 80%.0
- I fail to see how negative gearing is any more risky inside vs outside super? Dr Shane Olivers comments are spot on in that if the asset is not increasing and eventually making a "profit" then it doesn't matter what the ownership structure is.0
- The answer is not to ban LRBAs but to restrict the LVRs to something conservative so they are highly likely to be positively geared0
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