The AFR is running a couple of articles today on the strong rise of self-managed super fund (SMSF) investment in property, which has exploded since the former Howard Government legislated in 2006 to allow SMSFs to borrow money to purchase assets under limited recourse conditions (i.e. in the event of borrower default, the lender only has the right to recover losses from these assets). Prior to this, superannuation funds were not permitted to borrow money for investment, which limited the ability of SMSFs to directly invest in property.
According to Australian Tax Office (ATO) data, analysed by The AFR, the value of property held by SMSFs surged by 17% last year to over $20 billion:
Residential property holdings surged in the year to March 2014 to $20.5 billion, up from $17.5 billion a year before and there was a similar 17 per cent rise in commercial property holdings to $68 billion from $58 billion a year ago, according to the new figures.
Meanwhile, the ATO has reportedly begun a crackdown on SMSF property investors using a loophole in the rules whereby they lend money to their SMSFs at zero or low interest rates in order to get around contribution limits, thereby increasing the amount of money taxed at low rates and minimising tax paid:
The loan was at zero or low interest with long repayment terms and the money was to be used by the self-managed superannuation fund to invest in property, generating rental income taxed at 15 per cent, instead of at the top personal rate of 46.5 per cent.
Advisers said the Tax Office indicated at a meeting last Thursday that it did not approve of the loan strategy and would not issue favourable rulings to taxpayers wanting to use it…
Tax advisers have raised the alarm on the number of super-wealthy clients able to have incomes taxed at zero to 15 per cent, instead of the current top rate of 46.5 per cent, by using generous concessions and “cracks” in the superannuation system.
“There are probably 30 different strategies motivated by tax minimisation rather than a desire to self-fund one’s retirement,” one superannuation specialist said.
Personally, I view the Howard Government’s changes to superannuation, allowing SMSFs to gear into property, as an epic blunder which, along with the halving of capital gains tax rates in 1999 (making negative gearing more attractive), has encouraged greater housing speculation, and forced-up home prices to the detriment of first-time buyers.
As noted by Steve Keen today, the superannuation changes have effectively “underwritten speculation yet again rather than underwriting investment”, and it is “ludicrous that super funds should be able to take speculative positions and call it investing for their future”.
Encouraging more of the nation’s capital to be invested in non-productive property was retrograde policy both economically and socially. It has helped to further distort the economy by diverting resources from productive investment, eroding Australia’s competitiveness. And it has worsened housing affordability, to the detriment of younger generations, who have either been pushed-out of home ownership, or are required to take on jumbo-sized mortgages in order to achieve “the great Australian dream”.
