Research conducted by the Australian Securities and Investments Commission (ASIC) about the why people chose to set up an SMSF, indicated that property investment as the sole or predominant purposes continues to be an ongoing issue for SMSF’s.
Many people chose to set up an SMSF to invest in property. This is categorised by funds that solely invest in property, have fairly low balances, borrow money, and often bought of-the-plan property.
This rings a number of alarm bells for the ATO and regulators because they think that members of those funds will not be well placed to self-fund their retirement.
Some of the issues relating to an SMSF’s investment strategy which has high borrowings and predominant investment in property, relate to what happens when the member retires – does the property need to be sold, can you live off the rental yield, and what happens if prices drop?
People may not be fully informed of all the issues before making their investment decision, particularly where they are being advised by a one-stop-shop, being organisations which set up an SMSF for you, find you a property, work out your borrowing/finance arrangements and also prepare you legal documents and advice as well.
The ATO are finding many people that are not making a fully informed decision, and one that does not consider the risk of illiquidity and falling property prices.
There is an obligation on the trustee of an SMSF to consider the appropriateness of an investment decision when setting up and considering the investments of an SMSF.