12 April 2013 Super risks for investors

What are some of the pitfalls of holding an investment property in superannuation?

Generations of Australians have had a love affair with property, so it's not surprising investment in property through super is popular where investors have large cash reserves to draw on.

This trend has increased since self-managed super funds (SMSFs) became eligible to borrow money to acquire direct property.

But it's important to look closely before you leap.

Property investing within your SMSF is a highly-regulated affair and playing by the rules is essential if you are to avoid the perils and pitfalls.

The Australian Taxation Office advises trustees of SMSFs to exercise caution and take the time to understand their obligations under the law.

Your fund must be structured appropriately, managed correctly, and must have a written investment strategy.

Investments must be arms length and, in terms of property, ideally generate income and be able to be held for the long-term.

One of the biggest pitfalls investors find is that they are unaware of the additional complexity and time it takes to invest through this channel.

A traditional property sale and settlement can be handled quite swiftly: three months to find your property, organise your finance, sign a contract and be on your way.

Experts say that procuring a residential property within SMSFs can take up to 25 weeks by the time you set up the fund and bare trust, seek appropriate specialist financial and legal advice, identify an appropriate property, organise your finance, secure a good property manager and so on.

Common mistakes many people make when setting up SMSFs include: Trusts not being established at the time contracts are signed and dated; The property being held in the individual's name rather than the trustee of the holding account, and; Gearing that is not allowed under the law.
Some of these arrangements cannot simply be restructured.

The only option may be to unwind it, which could involve forced sale of assets at an inconvenient time.

This could be expensive to the fund with potential stamp duty and tax issues.

Do the wrong thing and there can also be big penalties. The fund's trustees can be disqualified, face civil penalties or even criminal charges.Companies that take the risk of marketing properties to SMSFs illegally could be referred to the Australian Securities and Investments Commission for prosecution.

The responsibility for ensuring your SMSF complies with the law rests with you.

It is good news that opportunities to invest in residential property within super are available through SMSFs. However, it's critical that it is appropriate to your situation and you get reliable, independent professional advice before committing.

Tony Winterbottom is a general manager of Defence Housing Australia.

Reproduced in full with permission: News Limited Network Super risks for investors
18 March 2013

Attention: This article is intended to provide general information only. Every attempt has been made to ensure the accuracy of this information at the date of publication. The opinions expressed in this article do not reflect those of DHA, its staff or agents. Property prices are subject to fluctuation. Prospective investors should seek independent advice. DHA will not be liable for any loss, damage, cost or expenses incurred or arising by reason of any person relying on information in this article.