Superannuation specialist Peter Crump urges self-managed super trustees not to rush to gear properties in a knee-jerk reaction to speculation that the Federal Government might reduce the tax benefits of gearing properties through SMSFs.
Crump, superannuation strategist for financial planner ipac in South Australia, warns SMSF trustees about the risk of buying unsuitable geared property in a hurried attempt to beat any potential legislative changes.
“You could end up with a potentially second-class investment which you are stuck with for a long time,” he emphasises. Any property and any gearing arrangement should really suit an investor’s circumstances.
Here are eight points for SMSF trustees to consider, given the rumours of a government strike against some of the tax benefits of gearing SMSF property:
1. Understand where the speculation is coming from and what is being speculated
Much of the speculation is based on vague newspaper reports as well as suspicions of what some sectors of the superannuation industry may be telling the government about possible tax savings in other superannuation sectors.
A key trigger for the speculation is, of course, the reality that the government is searching for ways to save money in an effort to report a promised budget surplus.
In early September, The Australian Financial Review reported that “generous capital gains tax breaks for self-managed superannuation funds which invest in property are the government’s clearest target” in its attempt to cut “billions in superannuation tax concessions”. The article then went on to specifically discuss gearing through SMSFs.
And late in September, The Australian wrote of speculation about a review of “tax breaks on borrowing to buy property through self-managed super funds”. Both papers ran the articles as their page one leads.
2. Understand how the government could attempt to reduce CGT tax concessions for geared property in an SMSF
Under existing law, superannuation fund assets backing the payment of a superannuation pension are not subject to capital gains tax (CGT) or any form of taxation. This applies no matter the type of asset.
SMSF specialist Graeme Colley says “it would appear” that the speculation is suggesting that capital gains upon the sale of a property supporting the payment of a superannuation pension may become subject to CGT if a property is geared. Colley is director of educational and professional standards for the SMSF Professionals’ Association of Australia (SPAA).
A surprising aspect about speculation of a government move against some of the tax benefits of geared property is that no super assets of any type are taxed if backing a super pension. Trustees could well ask: Why the speculation only about geared property? Why doesn’t the speculation extend to geared shares?
3. Understand that the government won’t collect a windfall by removing CGT breaks for geared property
The reality is that only a very small percentage of SMSFs hold geared property.
Philip La Greca, technical services director of self-managed super fund administrator Multiport, estimates that just 4% of the total assets in self-managed super funds would be geared property.
Of the 1,900 SMSFs being administered by Multiport, less than 16% of their assets are in direct property – and less than a quarter of the properties are geared.
4. Understand that if the government did reduce the tax benefits of geared property, it would face an outcry if the legislation affected existing arrangements
The bottom line is that the government seems unlikely to introduce retrospective legislation.
“Any government that makes changes that have an immediate effect on existing arrangements will be subject to cries of retrospective policy change,” says Crump.
“I am not saying that a government can’t introduce legislation that has an immediate retrospective effect but it would tend to hurt hard and be harder to introduce.”
5. Don’t rush into a geared property asset in response to vague speculation of legislative change
Crump cautions SMSF trustees about investing in geared property simply just because it seems like a good idea and on the basis of speculation that the government may reduce the tax benefit.
Crump says if your fund is contemplating gearing a direct property investment, the trustees should identify the most suitable property for their circumstances and the most suitable borrowing arrangements.
“SMSF trustees should go into gearing with their eyes wide open.”
And Colley believes the speculation shouldn’t stop an SMSF proceeding with a planned investment in a quality geared property. He says that if it’s a decent property that you would be willing to hold in your own name, “you would go ahead with the investment in your superannuation fund for similar reasons”.
6. Don’t dump an already geared property asset in response to the speculation
Crump says that if your fund has invested in a geared property for the right reasons, speculation about possible future tax changes shouldn’t encourage your fund to sell. (Also see Point Four above regarding retrospectivity.)
7. Know that a Treasury review of SMSF gearing arrangement is coming – regardless of the latest speculation
Treasury is expected to begin a review in December into the borrowing arrangements of SMSFs. In December 2010, the government had promised to conduct this review following its recommendation by the Cooper superannuation review.
This imminent review of gearing is unrelated to the prevailing speculation about a government strike against the tax benefits for geared SMSF property.
In mid-2010, the Cooper review had recommend that the government conduct an examination of SMSF gearing in two years’ time to “ensure that borrowing has not become, and does not look like becoming, a significant focus of superannuation funds”.
8. Expect a closer look at interest-free loans provided to SMSFs by their members
Some SMSF members, who may have large amounts of cash at hand, loan money to their SMSFs on interest-free terms to enable the funds to buy assets, included direct property.
David Shirlow, executive director of Macquarie Adviser Services, says there are expectations that it is only a matter of time until the government takes action in regard to these arrangements.
By Michael Laurence