In this guide
The popularity of property ownership through an SMSF continues to grow each year, with around 15% of all SMSF assets currently held in direct property.
SMSF trustees need to be aware that owning direct property through their super fund comes with certain ongoing obligations and it is important that each of these obligations is addressed appropriately, not only on the initial purchase of the property, but throughout the ownership.
Investment strategy considerations
All SMSFs need to have in place an investment strategy that documents the trustees’ plans and objectives for buying, holding and selling assets that are consistent with the investment objectives and retirement goals of fund members. Property assets can certainly meet these member objectives.
Investment strategies are not a set-and-forget document. In fact, the superannuation rules require a fund’s investment strategy be reviewed regularly with regulatory guidance suggesting that trustees carry out this review annually, at a bare minimum, but also at other times where the fund’s position may change.
Changes to the fund’s position that would usually warrant a review could include adding or removing fund members, the commencement of a pension or the payment of a large lump sum benefit, or where there has been a significant market event that could affect the value of the fund’s assets.
Where an SMSF owns direct property, there are a number of specific issues within the fund’s investment strategy that should be addressed both prior to the property being acquired and then each year as part of the review process.
Diversification
Due to the large investment amounts required, direct property ownership through an SMSF will often result in a lack of diversification. The super rules would therefore require SMSF trustees take this into consideration when developing and implementing their fund's investment strategy.
Although there is no formal requirement for an SMSF to hold a diversified portfolio of assets, there is a requirement that trustees at least consider the need to diversify and to consider the associated risks where there is a lack of diversification.
Having in place clearly documented reasonings for the purchase of the property, including market rates of rental income and expected capital growth, will go a long way in meeting the investment strategy requirements, especially where diversification is an issue.
SMSF trustees need to make sure that this is also addressed when carrying out their annual investment strategy review for their SMSF.
Liquidity and cashflow
Consideration should be given to the cashflow and liquidity requirements of the SMSF, including pension payments, any relevant loan repayments, property repairs and maintenance, tax expenses and other general fund expenses.
Due to the illiquid nature of direct property, trustees need to ensure that all of these expenses can be met with existing and future cashflow from the SMSF.
Where the cash flow requirements of an SMSF change, for instance where a pension is commenced by a member, trustees need to assess the continued appropriateness of owning direct property and if the cashflow from the property will be sufficient to meet these ongoing payments.
It is also important that SMSF trustees maintain clear evidence around these assessments, which would usually form part of their investment strategy review.
