SMSFs are well placed to become involved in property development after the lifting of the COVID-19 lockdown and should keep an eye out for stalled or lapsed developments requiring investors, according to an SMSF technical expert.
I Love SMSF chief executive Grant Abbott said SMSFs have continued to grow and will be well placed to act on recent guidelines released by the ATO around property development.
“I see the large industry funds, which have told the SMSF sector that it has too much cash and poor returns compared to them, being hit with a double whammy by allowing people to take out $10,000 now and in July, and those redemptions have a cyclical impact on the stock market,” Abbott said.
“This means that for the next few years SMSFs will be big for people aged 30 years and over and property stills remains the main game for many people, and while we still have LRBAs (limited recourse borrowing arrangements), we remain in a good position.”
He said Australia had responded extremely well to the COVID-19 pandemic and that would make it more attractive to “upper-level” immigrants and thus lead to further property development.
“We might be in recession for a few years, but that means all the ridiculous development sites and prices people were buying up are out the window and you should be able to buy property and development projects really cheaply at this point in time,” he said.
“If we look around Australia, where is most of the capital? Some industry funds are stuck trying to redeem units to get cash, but SMSFs still have more than $700 billion sitting in them.”
He pointed out there were limitations around the use of commercial property, but there would a range of developments taking place within SMSFs, including in the residential property sector under LRBAs to larger projects via joint venture arrangements.
“SMSFs are where the cash is and it makes good tax sense. It is a strategy that was not a ‘go-to’ a few years ago because no one was thinking about it, but I do the reverse now and will look at it with clients, and ask can we use the SMSF,” he said.
“Even if it is a property development that is part way through and can’t get funds, then the SMSF can buy part of that development because it will be treated as business real property through a joint venture.
“When there is a downturn in the market is the best time to use that SMSF money as it punches above its weight, and with less overseas investors, we are back on a good playing field.”
The recent ATO guidelines noted that property development was a legitimate investment within an SMSF and should be read by trustees considering this path as they provided a background to the chief areas of concern identified by the regulator, he said.