Pitcher Partners managing director Michael Minter said while the SMSF lending space has faced much tighter lending controls this year, particularly following the royal commission, the idea of using super to buy property within a super fund remains appealing to SMSFs from Generation X and Y.
While there are important risks to consider, Mr Minter said younger SMSF trustees are still attracted to holding property in super for some of the benefits associated with it including a lower tax rate on SMSF income, a lower capital gain tax rate and tax deductions such as insurance premiums.
Mr Minter said there are two main types of Generation X and Y investors.
“The first is the business owner who currently paid rent, but would prefer to buy a property, and have the rent paid into their super fund. The second wants to build their super balance through strategic property investments by borrowing and gearing,” he said.
Mr Minter warned that there are important considerations that need to be made before undertaking property investments in super or an SMSF, however.
Practitioners, for example, he said, need to review their client’s financial goals, current financial situation and tax obligations.
“Compare their current super fund against running an SMSF. Investment carries risk and the client must decide what level of risk you are comfortable with,” Mr Minter said.
He also noted that $200,000 is the preferable amount to start an SMSF.
“Before making any property investment, the client should establish a set of investment criteria that they are comfortable with, including whether it's residential or commercial, local or elsewhere or big or a mix of smaller properties. But whichever approach you adopt, research the options and the market thoroughly,” Mr Minter said.
All major banks have now exited the SMSF lending space, after SMSF borrowing became allowable under Australian law in 2007. Second-tier and smaller, boutique lenders are now poised to capture the lion's share of new business.
Competition in the market has also not been helped by the corporate regulator, ASIC, floating a ban on SMSF borrowing in an effort to minimise poor and conflicted superannuation advice.