By way of background in 2007 the Australian Government allowed superannuation funds to borrow under strict conditions. As a result of this legislation, executives, professionals and family owned businesses have chosen to purchase direct property as their investment of choice through their superannuation fund, rather than shares or managed funds.

SMSF Changes

Prior to the change in legislation, superannuation funds were unable to borrow under any circumstances, so they were essentially forced to save up the money in the superannuation fund if they wanted to purchase an investment property or business property in their superannuation fund. Given that the main way to accumulate funds in superannuation is via tax deductible contributions without gearing this has its limitations as they are limited to $30,000 per member under age 49 and $35,000 per member 49 years or older. Most funds could not accumulate sufficient funds quickly enough to purchase an investment property or business premises, particularly in a capital city in Australia without being permitted to borrow.

In summary, for  people wishing to use their superannuation to purchase an investment property to provide them with a stable income stream in retirement or business premises so that they could accumulate wealth and save  paying rent to a landlord, this change in legislation permitting borrowing in a superannuation fund was greatly welcomed.

However, now the final report from the Financial Systems Inquiry has concluded with its 44 recommendations.  The recommendation of concern is ‘Recommendation 8 – Remove the exemption to the general prohibition on direct borrowings for limited recourse borrowing arrangements by superannuation funds.”

We believe if this recommendation is implemented, many small business owners will suffer as they will not be able to use their existing super to help fund the purchase of their premises. This means that they would have to purchase smaller premises outside of the superannuation structure or continue to pay rent to a landlord.

Also, many executives and professionals are more comfortable making maximum superannuation contributions to reduce a debt in their superannuation fund that is secured against a property where they are familiar with the town or suburb of its location and can witness first hand its condition and quality, than make a similar contribution to, say a property trust managed fund. Typically, the investments in a property trust will be less transparent than a direct property investment. Also, many retirees will be aware that these investments can be frozen in tough times, for example, during the last Global Financial Crisis (GFC)

With industry research stating that a couple need to accumulate, for the purpose of retirement, approximately $900,000 in investment assets in today’s dollars ( that is, this figure is at least increasing by the rate of inflation each year until the date of your retirement), many people with mortgages and children cannot see themselves accumulate this increasing retirement  benchmark without a prudently structured gearing strategy, particularly if there is another GFC share market crash or recession before their retirement.

To ensure that your SMSF is structured and administered correctly please contact Peter Quinn by submitting an online enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.

Disclaimer:  The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it.  It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.