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The Federal Budget’s confirmation that the annual cap on concessional superannuation contributions for all fund members over 50 will halve to $25,000 from the 2012-13 financial year, has some investment commentators envisaging that more investors will turn to negative gearing.
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The latest bouts of sharemarket volatility and this month’s cut in official interest rates once again highlight the crucial role of bonds in a properly diversified investment portfolio.
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Self-managed super funds typically have a much high exposure to cash than fixed interest.
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The Australian superannuation industry reverted this week to its unwanted status as one of the government’s favourite Budget ‘hollow logs,’ with billions of dollars in savings extracted from the system by reneging on a tax break meant to encourage higher retirement savings, and a doubling of the concessional tax rate on the super contributions of those earning more than $300,000.
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Geared property in SMSFs: Don’t overlook the investment strategy 19 Sep 11
Self-managed super funds have not exactly jumped into gearing direct property.
Indeed, SMSFs have been somewhat subdued in their response to amendments to superannuation law amendments four years ago that unambiguously permit fund trustees to borrow to invest.
The latest Multiport SMSF Investments Pattern Survey notes that 14 per cent of the 1600 SMSFs administered by the firm borrow to invest, as at June 30 2011. Just over half of the loans are to buy direct property.
The tax office – acting in its role as regulator of self-managed super – has stirred up discussions over SMSF gearing by releasing a draft tax ruling last week.
Broadly, the draft ruling attempts to clarify the ATO’s interpretation of the borrowing laws concerning the maintenance and renovation of properties purchased by SMSFs with non-recourse loans. And it also discusses the gearing of off-the-plan apartments.
The draft ruling when released in final form should provide more certainty to SMSFs wanting to borrow to invest in properties. But it is, of course, a different matter whether gearing a costly investment property is a good idea for a SMSF given the particular circumstances of the fund and its members.
When thinking about borrowing to buy an investment property through an SMSF, many astute trustees would revisit their funds’ compulsory investment strategy.
During the preparation of their investment strategies, trustees must consider investment risk, portfolio diversification, liquidity of investments, ability to pay members benefits, and member circumstances.
Even though SMSFs are not required to have diversified portfolios, its trustees must consider the issue.
* Written by Robin Bowerman, Principal, Corporate Affairs & Market Development at Vanguard Investments Australia.
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