Property development risks flagged following member limit proposal
With the proposal to increase the SMSF member limit likely to entice some trustees into property development, one technical expert has highlighted some of the risks associated with this type of investment.
Miller Super Solutions founder Tim Miller said the appeal of property development never wanes among investors and trustees and the proposal to increase the SMSF member limit to six, may result in greater numbers of people looking to undertake these types of investments through their SMSF.
"There are always individuals who are interested in it without understanding what the potential ramifications can be," said Mr Miller.
While increasing the SMSF limit from four to six will increase the capacity for SMSFs to invest in these kinds of investments, he said, it also increases the capacity of the fund to have investment problems.
"Undertaking property development inside an SMSF has its own risks associated with it, particularly when you start to deal with leveraging and those sorts of issues," he cautioned.
"Often these transactions are better dealt with through an external entity. So rather than having all that activity within the super fund, hold it an unrelated trust and then participate on a fund by fund basis. I think that provides greater flexibility than trying to do it all within the one entity."
While undoubtedly one of the positives of having more members in the fund is greater access to capital and investments, he said, it also potentially creates greater liquidity issues if a member dies or a member leaves.
"All of a sudden you've got all these assets tied up in illiquid property investments and you have to find some other way to source those payments, so it comes with it's own administrative and investment issues as well."
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.