Speaking to SMSF Adviser, Wealth Within chief analyst Dale Gillham said he is seeing some SMSFs become involved in investments that are too high risk or illiquid for the life stage they are at, which is having negative consequences further down the line.
“I’m finding 55- or 60-year olds looking at buying into property and leveraging and buying funds to get into property for their super fund and it’s not necessarily a good investment at that stage when you’re just about to move into retirement,” said Mr Gillham.
In some cases, where the property or illiquid asset comprises a large proportion of the fund, SMSF trustees are finding themselves unable to meet the minimum payment requirements for their pension, he said.
“Whilst I do invest in property myself and promote people to do that, you’ve really got to have a balance,” he said.
“Especially in the retirement phase you’ve got to have more secure, liquid investments, and property doesn’t do that for you.”
In a presentation at the recent CPA SMSF conference, ATO assistant commissioner Kasey Macfarlane addressed similar issues.
“It’s not my intention to comment on whether or not real property is a good long-term investment; I just want to point out that it is undoubtedly a lumpy and illiquid asset and can present a liquidity problem, especially when it’s an SMSF’s major asset,” said Ms Macfarlane.
“For example, we see SMSFs paying pensions where the net rental income is insufficient and there are no other liquid assets or contributions being made to the SMSF.”
Mr Gillham said the problem was primarily an issue with unadvised SMSF trustees and stressed the important role accountants and advisers have in helping clients establish appropriate strategies.
Using large proportions of an SMSF to buy property is not something advisers would recommend since SMSF trustees “should have a spread of asset allocation”, he said.
Mr Gillham said that ultimately, trustees are responsible and accountable for understanding the requirements of running an SMSF but added that advisers and accountants can help educate clients not only in their duties around compliance but also in the investment management of the fund.
And this is while interest rates are low and values are increasing! How many more will strike trouble when interest rates rise?
I would suggest that ASIC will be looking very closely at the Best Interest requirements of accountants advising their clients, regardless of age or the corpus of the fund to invest in property within the SMSF structure. I can understand investing property where the property makes up an equal or lesser sum than the cash holding but not where it is significantly greater, say 75% or more. Why are 60 plus year olds investing property anyway? Obviously for tax reasons but if they have the funds then use a simple trust or corporate structure. Super is for cash in retirement not to provide a house for adult children.
This is a major problem with property in SMSF’s. Clients get emotionally attached to real estate and do not want to sell it. When it is time to start a pension they find that residential property does not generate sufficient cash after expenses to support a pension. This gets more difficult as the member ages and the minimum percentage goes up.
How very true. Well said! But the fact remains who, if anyone, is advising these people to make these investments? I know that some property people are, some financial people are, so why aren’t they seeking other confirmation, a second opinion, call it what you want. I bet they get a second opinion to buy a pair of socks!!! George Lawrence, Chartered Accountant, Bowral, NSW.
As a SMSF auditor, I agree with the comments in this article. In addition, I have concerns about SMSFs that have similar investments, where the fund has 2 members and would not have sufficient liquid assets to pay out one member’s benefit should that member pass away. Such a strategy may be detrimental to the remaining member. This is where the investment strategy does need to be considered.