The Federal Court handed down a very significant decision for SMSFs in December last year that largely went unnoticed.
The court ruled against fractional property investment manager DomaCom in a case testing the boundaries of the in-house asset rules as defined by the Superannuation Industry Supervision Act 1993.
Basically, DomaCom wanted a ruling from the court as to whether a residential property either partly or wholly owned by an SMSF through a sub-fund could then be leased to a child of the SMSF’s member or members without it being considered an in-house asset.
The court deemed this set of circumstances would still render the property in question an in-house asset and therefore could not exceed 5 per cent of the total asset value of the SMSF in question.
When analysing the decision it would again appear the authorities formulating legislation and those interpreting it and upholding it are not singing from the same hymn book. Either that or some of the recent measures and messages the federal government has been providing are paying pure lip service with no conviction.
I come to this conclusion in the context of changes made to the superannuation system in the 2017 budget, namely the downsizer provisions and the First Home Super Saver Scheme. Both of these measures were the government’s way of attempting to tackle the housing shortage for first home buyers, but sadly both are flawed.
The downsizer provision, whereby an individual over the age of 65 can contribute up to $300,000 from the sale proceeds of a principal place of residence, assumes the properties sold in these circumstances are those that can be made available to first home buyers. Given the sizes of these types of home, that’s extremely doubtful.
In addition, if people in their retirement are genuinely downsizing, they would probably then be on the hunt for a smaller abode, perhaps a unit, subsequent to the sale of the family home. Would this not then pitch them into the same overcrowded market as most first home buyers?
With regard to the First Home Super Saver Scheme, participants can only effectively apply $30,000 plus the deemed earnings rate toward their first home. If you live in Sydney or Melbourne, this isn’t exactly going to get you very far.
So it would appear these two measures will end up being pretty ineffectual in helping to solve the housing crisis for younger people.
But if this is a situation on which the government wants to make a meaningful impact, why not look at amending legislation to allow an arrangement like the DomaCom proposal to be allowed unencumbered?
The property would still be have to be held via a third party with this additional layer reinforcing the arm’s-length nature of the ultimate rental contract. This in turn would guarantee a proper commercial rate of rent would be paid.
And with a legitimate commercial rent being paid, proper returns and retirement earnings would still be generated.
Granted this arrangement would not allow the child or children in question to own their first home, but it would at least give their parents a more tax-effective way to fund a place of abode for them – something the parents would likely end up doing anyway.
Allowing the arrangement to avoid the in-house asset net would potentially allow a lot of SMSF capital to contribute to the housing accommodation shortage.
No doubt the naysayers will point out it would just be another way SMSFs would be gaining an unfair advantage. But if the government wants superannuation capital to be allocated more efficiently so as to act as a solution to other weaknesses in the economy, such as infrastructure spending to name one, it must begin to see the value of set-ups that are slightly outside the square and start endorsing them.
Without a commitment to more meaningful action, any initiatives such as the downsizer provision and the First Home Super Saver Scheme can only be perceived as what they really are – half measures or token gestures.
