It is becoming increasingly popular for individuals to purchase investment properties using their self-managed super funds (SMSFs). It was reported by the ATO in 2013 that of the 1 million Australians whom have a SMSF, they account for $520.5 billion of the $1.7 trillion of the nation’s superannuation funds, so it is no surprise that there has been an increase in the utilisation of these funds by their trustees. However, when purchasing property through your SMSF, it is important that you are able to determine if this investment strategy is right for you in order to avoid any unnecessary risks.

Limited Recourse Borrowing Arrangements (LRBA) is a key factor in the recent increase in SMSFs being used to purchase property. An LRBA usually involves a self-managed super fund (SMSF) taking out a loan from a lender or related party, where only the asset purchased with the loan can be used if the fund finds itself unable to make repayments.

A clear positive with an LRBA is that your overall super fund is not put at risk in the circumstance that you default on your loan. As well as this, purchasing property through an SMSF means that your fund will only be taxed at 15%, which is notable lower than personal income tax rates, and the capital gains tax (CGT) associated with the property will be calculated at a discounted rate. The sale of the property may even be tax free if sold when the fund is paying pensions.

With this growing popularity in using SMSFs to purchase property, there have been calls to the federal government to implement a policy that will govern the use of LRBA. In light of this, the federal government announced last week that that they don’t agree with the recommendation by the Financial System Inquiry (FSI) to ban LRBAs by superannuation funds. Although there are a few concerns about LRBA, there is not sufficient data at this point in time for the government to justify policy intervention on the matter.

Despite this however, the government have still committed to commission the Council of Financial Regulators and the ATO to monitor leverage and risk in the superannuation system. This information will be presented to the government in three years, and from there a decision will be made on whether or not a policy needs to be put into place. The three-year time span will allow the ATO’s improved data collections to filter through the system and determine if the decision is appropriate.

Ultimately, with the LRBA in SMSFs remaining the same, it is important to ask yourself the following questions while thinking about purchasing property through your super fund:

• Will this property be a good investment?
• Is the value of the property likely to appreciate?
• Are there unnecessary risks involved?
• What is the property yield?