Investing in property via an SMSF
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The introduction of the self-managed superannuation fund (SMSF) 20 years ago gave Australians greater flexibility, control and choice over how they invest their retirement savings.

Property ownership has long been seen as an indicator of wealth, security and success in Australia, so it is no surprise one of the key motivations for setting up an SMSF has been to invest these savings in real estate, and enjoy a number of the tax benefits and rental income.

However, setting up and running an SMSF isn't that simple. There are many compliance rules and requirements concerning diversity, liquidity and governance that must be followed.

Since its inception, there have been numerous changes to these rules, such as the Treasury Laws Amendment (Fair and Sustainable Superannuation) Regulations 2017, involving major changes to the contribution caps, transfer balance caps, death benefits and more. 

Why the ATO is taking an interest in SMSF investing

The issue that has caught the attention of the Australian Taxation Office (ATO) recently is the number of SMSFs set up purely to invest in property. This is especially the case where to obtain the property, the SMSF needed to acquire loans guaranteed by assets outside the fund; putting it in a riskier position. As a result, the ATO has increased its scrutiny of SMSFs and started cracking down on funds failing to meet their strict requirements.

One of the ATO's main concerns is the number of SMSFs investing in a single class asset such as property. Investing in a single class asset is like 'putting all your eggs in one basket', or in one property.

This means that if the asset performs poorly, such as a sharp decline in house prices or a share market crash, there is an increased risk that the investor could lose all, or a significant part of, their retirement savings in their SMSF.

In the worst-case scenario, where an investor decides to use debt guaranteed by another asset outside the SMSF, such as their home, investors are at risk of losing both the investment and other assets. This is why the ATO has stated that it is taking a keen interest in SMSFs with riskier investment strategies.

By contrast, an investor who spreads their savings over multiple investment types with limited use of debt might still face a decline in fund performance; however, the impact of a single poorly performing investment will be less severe on the overall financial health of the fund.

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