The overwhelming number of SMSFs holding direct property suggests trustees have “forgotten that the role of a SMSF is to fund retirement”, according to HLB Mann Judd.
The firm’s wealth management partner, Michael Hutton, said people in retirement should be focusing on income over the medium term with enough capital growth to maintain income levels in the longer term.
“The basic fact is that residential property investment, particularly when the market is close to a peak as it must be now, has to be a long-term strategy to get the capital gains sought,” Mr Hutton said. “The rental yield on such properties, particularly after expenses, is often very low.”
Major cash flow problems can occur where gearing is involved, Mr Hutton warned, particularly for those drawing a pension from their fund or expecting to draw a pension within the next several years.
Even younger trustees should consider very carefully whether holding residential property in an SMSF rather than in their own name is best for them, he added.
“One of the attractions of property investments is the negative gearing tax provisions, which are most beneficial to people on a high rate of tax,” Mr Hutton said.
“SMSFs are either a low tax or “no tax” environment,” he said.
Mr Hutton warned those looking to invest in property via an SMSF to avoid spruikers and to seek impartial advice.
While the risks of holding too much of one asset are well known, there are other problems associated with investing in property via an SMSF, he said.
“Ideally retirees should be debt-free and have assets generating plenty of income to fund their lifestyle,” he said.
“Trustees of SMSFs also need to be mindful that upon the death of the last member, the fund must be wound up."
Illiquid assets such as property take time to sell, while transferring a property to beneficiaries in specie will incur stamp duty and conveyancing costs, Mr Hutton said.