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This commentary is written by Vanguard Principal, Corporate Affairs & Market Development Robin Bowerman. The title is Geared property in SMSFs: there is plenty to think about

It was first published on Tuesday 5 June 2012

And is read by Michael Mullins

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.

The recent release of a final ruling by the tax office in its role as regulator of self-managed super has led to a succession of articles by superannuation commentators about the gearing of property in SMSFs.

In summary, the lengthy ruling explains in detail how the regulator interprets a range of key provisions in the SMSF borrowing laws regarding the financing, repair, maintenance and improvement of geared assets.

Although the ruling generally applies to all assets that can be geared in an SMSF, it largely focuses on the gearing of property.

The final ruling, for instance, gives SMSFs a broader understanding of the extent of improvements that can be carried out to a geared property, according to the tax office’s interpretation, without upsetting existing gearing arrangements.

It will be interesting to see what effect, if any, the release of the ruling will have on the number of SMSFs that are willing to gear direct property.

Since the superannuation law was amended almost five years ago – co-incidentally on the eve of the GFC – to expressly allow SMSF gearing under strict conditions, a relatively small percentage of funds have chosen to gear property or shares.

This apparent reluctance of many funds to borrow to invest is particularly understandable given the difficult share and property markets.

Research by SMSF administration firm Multiport shows that 14 per cent of its client funds held geared investments at the end of March 2012 – compared with 13 per cent 12 months earlier.

Almost 60 per cent of the total amount borrowed by these super funds was used to buy property with the remainder invested in “financial assets”. The average property loan was $294,000.

Interestingly, only a fifth of the Multiport client funds with direct properties had geared these assets.

SMSF trustees who are considering gearing a property, or any other asset for that matter, have plenty to think about beyond the prevailing state of the markets.

The fact that an SMSF is permitted to gear investments within the stringent restrictions set by the Superannuation Industry (Supervision) Act 1993 is a different issue to whether gearing is an appropriate strategy given the circumstances of a fund and its members.

Crucial considerations – perhaps to discuss with a financial planner before deciding whether or not to gear a property – include the fund’s diversification, liquidity, ability to pay member benefits when necessary, and investment risk.

And that concludes the column

Geared property in SMSFs: there is plenty to think about

from Robin Bowerman,  Principal, Corporate Affairs & Market Development at index fund manager Vanguard Investments Australia

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Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.