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Don’t blame the people in large SMSFs

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I was interested to see Duncan Hughes’ article in the Weekend Australian Financial Review. Duncan spoke of “Mega SMSFs” and the issue of property and borrowings in funds.

First “Mega SMSFs”, yes there are some funds with huge balances, but they have been built over many years, when it was easier to make significant contributions for SMSF. They used the legislation as it applied at the time and used it quite legally. Of course those funds will have added significant income over time.

Yes, it may not seem fair to some people who are now asked to take cuts to help finance the Australian budget deficit. 

Maybe one day the Federal Government will legislate to impose a higher tax rate on ‘Mega SMSFs”. Meanwhile, whenever you survey anything, there will always be people at the “top of the tree”. Perhaps we should be glad they have invested their funds, hopefully mostly in Australia.

Which leads me into the second issue covered: investing in property and associated borrowings. People are arguing SMSF should not be allowed to borrow to purchase property. It can be implied it is wrong in some way. Again, provided what is done is within the law, then it is acceptable to borrow and purchase.

It is important to relate any proposed investment to the investment strategy of the SMSF and age of the members. Generally property is a long term investment, so may not be suitable for some older SMSF members.

Also, it is important to consider the “Sole Purpose” test. I have written about this previously. An SMSF must be maintained for the benefit of accruing retirement saving for the members. What will happen when the prices of real estate drop, will there be sufficient time and contributions to weather the price drop?

Before your fund invests in real estate by way of borrowing, I suggest checking with your SMSF Auditor to be sure what is proposed is appropriate and will not lead to a compliance breach.

I want to make clear actions by Trustees of SMSF, provided they are undertaken within the law, are perfectly acceptable. It is worrying if the poor press ends up altering SMSF regime in Australia, especially if it catches the many SMSFs slowly building retirement savings for members.

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© David Saul – Saul SMSF

David was among the first professionals to be accredited through SPAA as an SMSF Specialist Advisor™. He is also a Chartered Accountant and holds a Bachelor of Financial Administration from the University of New England, Armidale NSW.