Trustees falling into LRBA traps with bankruptcy
Some business owners falsely assume an SMSF can be used to protect assets in the face of other financial difficulties and are consequently making inappropriate property investments, one consultant has warned.
Speaking at the SMSF Association State Chapter event this week, Miller Super Solutions owner Tim Miller said he is seeing too many trustees acquiring residential property without adequately looking into the benefits of the specific property by considering where it is located and its capacity to provide returns.
“Where I’ve seen that lead to trouble is when clients have got financial difficulties outside [their SMSF] and see superannuation as a protection mechanism,” said Mr Miller.
In these situations, the client thinks that by buying the property via their SMSF it is protected from their other financial difficulties.
“This can be become very problematic because small business operators who have gone into bankruptcy with these limited recourse borrowing arrangements in place can then no longer act as trustee of their super fund,” he said.
“So they’ve got this illiquid asset that hasn’t reached it’s true value potential, they’re going through financial issues on the outside, and they have to actually remove themselves from the super fund.”
In these situations, it is more than likely the SMSF trustee will need to do a fire sale and effectively wind up their SMSF.
“The SMSF was probably only set up for the property in the first instance,” he added.
Mr Miller stressed how important it is that SMSF practitioners ensure their clients are investing in residential property through their SMSF for the right reasons.
“[Practitioners need] to discuss these issues with people to make sure they’re doing it for the right reasons," he said. "That they’re identifying the likely return from the property; they’ve investigated the re-sale value of other properties in the area; and that all those other issues are going to lead to a situation where there is at least some form of return.
“When you look at the overall return from a residential property versus the cost associated with it, it’s not that beneficial, from what I’ve seen,” Mr Miller said.