There is a “very real probability” that the end of the property bubble and a potential drop in unit rents could result in liquidity issues and “SMSF failures”, according to one prominent industry lawyer.
Speaking to SMSF Adviser, managing principal of Argyle Lawyers, Peter Bobbin, said what often follows a stock market routing is a property devaluation so SMSFs that have bought in cyclical and volatile property market areas could see liquidity issues and therefore SMSF failures.
“If you have so much of your investment in what is a clearly, a massively illiquid asset such as real estate, and the debt to loan ratio is out of whack or is now inconsistent with what the lender requirements are, then I can see where a SMSF may have to engage in a forced sale,” said Mr Bobbin.
“A forced sale may very well give rise to lower property realisations and it may simply end up in SMSF failure.”
Mr Bobbin said he had seen one example where a client with substantial income but no real assets bought two units on the Gold Coast side by side and joined them into one, spending $3.5 million in the process.
“For financial crisis reasons, he had to sell about three years ago; at auction he got $1.6 million,” Mr Bobbin said.
“So he spent $3.5 million and got $1.6 million over the course of only five years.”
Mr Bobbin said there will be SMSFs, like this client, that have bought real estate at the top of the market in these types of volatile areas.
“If you look at places like the Gold Coast, or particularly south-east Queensland and Google property prices, you’ll see how severely they fluctuate,” he said.
“Sadly, what happens is people go up to the Gold Coast and think sunshine, surf, the Great Australian Dream, they drop by a real estate agent, not expecting to do anything, but they walk away having bought something and they then lose a lot of money.”
SUBSCRIBE TO THE SMSF ADVISER BULLETIN
- 26 Sep 2017ATO set to add new items to SMSF watch listBy Katarina Taurian
- 26 Sep 2017ATO tipped to scrutinise property development and unit trustsBy Jotham Lian
- 26 Sep 2017Statistics reveal full impact of events-based reportingBy Staff Reporter
- 26 Sep 2017Tax advice exemption discrepancy driving away accountantsBy Jotham Lian
- 26 Sep 2017Consultant flags strategies to negate complex ECPI calculationsBy Miranda Brownlee
- 25 Sep 2017Survey results point to major concerns with new reportingBy Miranda Brownlee
- view all
- ATO tipped to scrutinise property development and unit trusts
One big four accounting firm says the ATO has started to zoom in on property development in unit trusts being held in SMSFs and the calculat...read more
- Statistics reveal full impact of events-based reporting
Analysis conducted by SMSF software provider BGL Corporate Solutions has indicated that around 290,000 SMSFs will be affected by the events-...read more
- Tax advice exemption discrepancy driving away accountants
A discrepancy in ASIC’s treatment of licensed and unlicensed accountants in relation to the tax advice exemption instrument is driving acc...read more
- view all