Borrowing to invest in property and purchasing property to develop it are the most popular topics of inquiry from potential trustees who want to establish an SMSF.
Nabtrade SMSF and investor behaviour director Gemma Dale said investors are very excited about borrowing through their SMSFs to invest in property and the idea of one fund for a family, but the excitement tapers once they understand the regulations, limitations and restrictions.
Dale told the 2018 Australian Securities Exchange Investor Day last week while there were restrictions around borrowing to purchase property, she warned against borrowing within an SMSF to develop property.
“You can only borrow to buy a single acquirable asset. It doesn’t sound like it means a lot, but when I said you almost definitely can’t do development, if you borrow to buy a block of land, the second you want to put something on top of that block of land it’s no longer the single acquirable asset you acquired,” Dale said, adding this is also the case if an investor purchased a single block of land or dwelling but then wishes to subdivide.
Members can modify property once the loan is paid off and they are using other money to make the modifications.
“With super contributions being what they are and so on, they don’t have enough in their super to be able to take on meaningful property development in the fund without borrowed money,” Dale said.
“Property development is just too difficult in an SMSF in most scenarios, which is pretty much intentional on behalf of the regulator because it tends to be higher-risk activity and they don’t want super to be a higher-risk structure. It’s supposed to be there for your retirement.”