Don’t overreact to speculation of government move against gearing SMSF property

feature-erase-mortgage-200Superannuation specialist Peter Crump urges self-managed super trustees not to rush to gear properties in a knee-jerk reaction to speculation that the Federal Government might reduce the tax benefits of gearing properties through SMSFs.

Crump, superannuation strategist for financial planner ipac in South Australia, warns SMSF trustees about the risk of buying unsuitable geared property in a hurried attempt to beat any potential legislative changes.

“You could end up with a potentially second-class investment which you are stuck with for a long time,” he emphasises. Any property and any gearing arrangement should really suit an investor’s circumstances.

Here are eight points for SMSF trustees to consider, given the rumours of a government strike against some of the tax benefits of gearing SMSF property:

1. Understand where the speculation is coming from and what is being speculated

Much of the speculation is based on vague newspaper reports as well as suspicions of what some sectors of the superannuation industry may be telling the government about possible tax savings in other superannuation sectors.

A key trigger for the speculation is, of course, the reality that the government is searching for ways to save money in an effort to report a promised budget surplus.

In early September, The Australian Financial Review reported that “generous capital gains tax breaks for self-managed superannuation funds which invest in property are the government’s clearest target” in its attempt to cut “billions in superannuation tax concessions”. The article then went on to specifically discuss gearing through SMSFs.

And late in September, The Australian wrote of speculation about a review of “tax breaks on borrowing to buy property through self-managed super funds”. Both papers ran the articles as their page one leads.

2. Understand how the government could attempt to reduce CGT tax concessions for geared property in an SMSF

Under existing law, superannuation fund assets backing the payment of a superannuation pension are not subject to capital gains tax (CGT) or any form of taxation. This applies no matter the type of asset.

SMSF specialist Graeme Colley says “it would appear” that the speculation is suggesting that capital gains upon the sale of a property supporting the payment of a superannuation pension may become subject to CGT if a property is geared. Colley is director of educational and professional standards for the SMSF Professionals’ Association of Australia (SPAA).

A surprising aspect about speculation of a government move against some of the tax benefits of geared property is that no super assets of any type are taxed if backing a super pension. Trustees could well ask: Why the speculation only about geared property? Why doesn’t the speculation extend to geared shares?

3. Understand that the government won’t collect a windfall by removing CGT breaks for geared property

The reality is that only a very small percentage of SMSFs hold geared property.

Philip La Greca, technical services director of self-managed super fund administrator Multiport, estimates that just 4% of the total assets in self-managed super funds would be geared property.

Of the 1,900 SMSFs being administered by Multiport, less than 16% of their assets are in direct property – and less than a quarter of the properties are geared.

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